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The Circle Bastiat

Prices are rising with the money supply

As prices start to rise, don't forget about all the money that the Fed created out of thin air.

By Jeffrey TuckerGuest blogger / February 27, 2011

A man shops at Wegmans Foods store in Fairfax, Virginia, on February 24, 2011. Is the large supply of money that the Fed created causing inflation?

Jewel Samad/AFP/Getty Images/Newscom

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I’m pleased that we have run Frank Shostak’s piece this morning on inflation data, and it’s pretty alarming but it strikes me that the piece still understates the threat and the reality.

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This morning at the store, a fruit drink I usually buy just went from $2.50 to $3.20 in something like two weeks. The apples I bought seem to have jumped 25%. The checkout lady confirmed soaring prices in isle after isle, and I noted that customers in front and behind me were scrambling for coupons and muttering about price hikes. We’ve already known that producers have been repackaging and shrinking their products for 12 months: this is always the first step before price increases. But this only works so long. Finally, the inevitable can’t be put off any longer.

CNBC reported yesterday that at a food industry conference, major suppliers were talking about increases of 4 and 5 percent on top of increases at the same level only last month. Past data already show crazy price increases on things like butter (20% YTD), lamb (18.9% YTD), bacon (11.3% YTD), and even potatoes (6% YTD). The explanation is always the same: weather plus rising demand.

Why is it that by the time price inflation comes around, everyone seems to forget about the money question? It doesn’t matter that the monetarists once seem to dominate the day with the quantity theory or that the Austrians have been talking about this issue for 100 years. When it comes to the reality, casual observers hardly ever mention money and monetary policy. So far, we are being told that it is mother nature at work plus consumer greed. I suppose next we’ll be hearing about producer gouging.

And yet the reality is there for anyone to see. The Fed created an unprecedented amount of reserves out of thin air and with recovery in the air, the banks are using them, causing the money creation. All of this is explained in detail in books such as The Inflation Crisis and How to Resolve It – which might be the best journalistic reduction of Austrian monetary theory around.

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