Federal Reserve’s Policies, Not Supply Chain Improvements, Have Dampened Inflation, Says Think Tank

The American Institute of Economic Research has attributed the recent easing in inflation to the monetary policies of the Federal Reserve rather than improvements in supply chains.

What Happened: The American Institute of Economic Research report suggests that the Federal Reserve’s monetary tightening, not repaired supply chains, is principally responsible for the recent slowdown in inflation, reported Business Insider on Sunday.

Alexander William Salter, a senior fellow at the institute, disputes the commonly held belief that restored supply chains and growing inventories are the primary causes of the current disinflation.

Salter argues that reality and economic theory do not support this viewpoint. Despite improved productive conditions, they are not the main cause of the current slowdown in inflation. Contrary to expectations, post-pandemic goods prices have stayed high even with reduced shipping and energy costs.

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Salter underscores that the post-pandemic inflation surge can be better credited to the increase in federal spending during COVID. The subsequent disinflation results from the Federal Reserve’s actions, demonstrating the efficacy of raising rates 5.25 percentage points over 16 months, along with reductions in the central bank’s balance sheet.

Why It Matters: These arguments potentially reaffirm traditional macroeconomic inflation theories, which have been under scrutiny as price growth seemed less linked to demand and employment. However, recent research suggests that supply-chain issues may have had a larger impact on price increases than previously thought.

Meanwhile, Former Treasury Secretary Larry Summers recently expressed concern about the ongoing risk of inflation, emphasizing that it remains one of the most significant risks for the upcoming year, as shared in his interview with Bloomberg.

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