stock here: energy, gov policy, and inflation. I spent $1350 last night on “miscellaneous” at Lowes, it was 1 cart.
Energy: A Key Factor in Inflation, But Not the Only One
Inflation has been a hot topic of discussion for decades, and while the causes of inflation are multifaceted, energy costs are undeniably a significant factor. However, they are far from the sole driver of the broad, generalized price increases we’ve experienced in recent years. To understand how energy plays into the bigger picture, we must also consider the overarching influence of monetary policy, government edicts, and other economic dynamics.
Inflation and Money Supply: The Core Driver
At its root, inflation is largely a monetary phenomenon. When the money supply grows faster than the real economy—defined as the total goods and services available—it results in too much money chasing too few goods. For example, if the economy grows by 3% but the money supply increases by over 40%, widespread price increases become inevitable. This isn’t speculative; it’s a well-established principle of economics.
During the Carter administration, the concept of money velocity—how quickly money circulates in the economy—and measures like M2 and M3 were central to discussions about inflation. Paul Volcker, as chairman of the Federal Reserve, famously used these tools to curb the inflation of the late 1970s and early 1980s. His focus was on controlling the money supply and reducing its velocity, effectively breaking the inflationary spiral.
Energy as a Catalyst for Inflation
Energy costs, however, play a critical role in shaping inflation. The Arab oil shocks of the 1970s were a stark reminder of how rising energy prices can ripple through the economy. High energy costs increase the price of production, transportation, and goods, leading to wage-price spirals as businesses and workers adjust to rising costs.
Today, energy remains central to inflationary pressures. As the cost of oil, gas, and electricity rises, it impacts nearly every sector of the economy. Recognizing this, policymakers like former President Trump emphasized energy independence and cost reduction as a strategy to combat inflation. Lower energy costs not only reduce the direct price of fuel but also mitigate secondary price increases in goods and services.
Government Edicts and Localized Price Spikes
Beyond energy and monetary policy, government regulations and mandates also contribute to inflation, particularly in localized areas. Policies like rent control or mandated wage increases for specific sectors, such as hotel workers, can lead to sharp price increases in housing or services. These localized pressures are distinct from generalized inflation but can exacerbate the overall cost-of-living crisis in affected areas.
The Debt Bubble and the Dollar’s Decline
Inflation is also tied to broader economic strategies, such as the decision to inflate the money supply to address debt burdens without raising taxes. This tactic effectively allows governments to pay back borrowed money with devalued currency, eroding the purchasing power of the dollar. However, this approach has long-term consequences, including declining global confidence in the dollar as a reserve currency.
Countries seeking alternatives to the dollar for trade are a direct response to its diminishing value. Economically, it’s hard to blame them. For those with investments in hard assets or inflation-resistant stocks, inflation can be a windfall. However, for young families and first-time buyers, inflation has made homeownership increasingly unattainable, weakening their stake in communities and encouraging transient lifestyles centered around consumption rather than equity building.
The Bigger Picture
Inflation is a complex beast with many contributing factors. While energy costs are a visible and impactful driver, they are just one piece of a larger puzzle. The primary engine of widespread inflation remains changes in the money supply. At the same time, government policies, global trade dynamics, and energy prices amplify and shape the specific contours of inflation.
For a sustainable solution, policymakers must address these factors holistically. Controlling energy costs, stabilizing monetary policy, and fostering equitable economic growth are all critical components. Without coordinated action, inflation will continue to act as a hidden tax, disproportionately benefiting the few while pricing out the many.
This nuanced understanding of inflation highlights the interplay between energy, monetary policy, and government actions. By addressing each factor strategically, we can build a more resilient economy that supports growth and opportunity for everyone.