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Record inflation levels are coming with no growth, 'the worst of all worlds' - Steve Hanke

Kitco News

Inflation in the U.S. will climb to between 6% and 9% by year-end, said Steve Hanke, professor of Applied Economics.

Speaking to David Lin, anchor for Kitco News, Hanke, who has served on Ronald Reagan’s Council of Economic Advisors, said that the rapid growth of the money supply last year has “worked like a charm” in boosting the economy and in turn, fueling growth in asset prices.

Hanke’s comments come as headline inflation in June reached 5.4% year-on-year, the highest on record since 2008.

He noted that the rise in inflation in 2021 has been caused “100%” by the growth of the money supply.

“The main thing about inflation is that it is always and everywhere a monetary phenomenon. This is what Milton Friedman taught us long ago and the transmission mechanism goes from growth in the money supply to growth in asset prices to growth in economic activity to ultimately to increased inflation. That’s the transmission mechanism. It always works,” he said. “Right now, the rate of growth of the money supply has been about three times higher than the rate of growth should have been if the Fed would have wanted to reach its inflation target of 2%.”

Hanke added that between 6% and 9% inflation, the economy will experience the highest growth in consumer prices since the 1970s, an era that experienced an economic phenomenon of low growth and high inflation known as stagflation.

“We’d be clawing our way back into those stagflation years in the 1970s,” Hanke said.

Although stagflation is the situation we are likely headed towards, the economy currently is not that bad yet.

“[The 1970s] was terrible,” he said. “It was the worst of all possible worlds. You have a lot of inflation and jobs are scarce. That’s not what we’re seeing now, by the way. We’re seeing inflation in a booming economy. We’re not seeing the stagflation type of thing where the real economy is weak. The real economy is very strong and booming right now as we’re coming out of lockdown and things are getting on track.”

For more information on how the consumer price index (CPI) is calculated, watch the video above. Follow David Lin on Twitter: @davidlin_TV (https://twitter.com/davidlin_TV).

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