Unsurprisingly, central banks are reluctant to claim credit for inflation. In their latest bulletin, the European Central Bank (ECB) published the graph below explaining what causes inflation.
See the problem? Neither the money supply nor the ECB are mentioned. While there are many factors that influence the purchasing power of money, inflation is still inherently a monetary phenomenon and the role central banks play simply can’t be ignored.
Instead, the ECB prefers to do what all central banks did just before the 2009 great recession: blame inflation on rising food and energy prices. But large central banks like the ECB have a strong and disproportionate effect on energy prices, as predicted by Austrian business cycle theory. The rise in oil prices in 2007, for example, was triggered by the end of the euphoric monetary boom initiated by the Fed and the ECB in the years prior. As investment in energy production was fueled, in part, by credit expansion instead of real savings. The quantity of producer’s goods – or at least of some of them – revealed themselves to be insufficient to complete the plans of entrepreneurs, thus generating a sharp increase in their prices.
This post was published at Ludwig von Mises Institute on June 23, 2017.