October 26, 2025

Consumer prices posted a 3% year-on-year increase in September, according to data published Friday from the Bureau of Labor Statistics. Yet no one seemed concerned or worried about the 3% inflation rate well above the Fed 2% target rate. In fact, the inflation rates of the last few months have prompted the Wall Street Journal to wonder whether “three” is the new “two.” If, as we believe , inflation is too much money chasing too few goods, all else the same an increase in the real GDP growth rate should be disinflationary. Hence, we believe and argue that many of the policies adopted by President Trump , such as the extension of the 2017 tax rates and the decrease in the regulatory burden should have encouraged more goods supply and as such should be working to reduce the inflation rate. Yet the recent numbers indicate that this is not the case. If the fiscal policies are disinflationary , then the persistence inflation rate has to be attributed to the Fed’s actions. The combinations of inflation rate and quantity of money fluctuations can also be used to make inferences about the Fed operating procedures. Given the fact that over the last five decades the US inflation rate has been positive , we surmise that the M2 grew faster than the demand for money during that time. The excess money supply resulted in an increase in the inflation rate. On average, the magnitude of the increases was proportional to the excess money supply. The Great Moderation or Price Rule period posted the smallest average difference between the M2 growth and the money demand growth. One explanation is that as a result of the Price Rule operating procedures. The Fed accommodated a substantial portion of the fluctuations in money demand .Hence a positive and smaller excess money supply would result in a positive and yet smaller inflation rate. That is how Paul Volker was able to generate the Great Moderation that led to a 2% average inflation rate. The data is consistent with our interpretation. This is in contrast to the quantity rule period. As the Fed attempted to control the quantity of M2 growth , fluctuations in the demand for money , mostly due to changes in the velocity of money, resulted in an increase in the level and volatility of the US inflation rate. In fact, as the excess money supply erratically increased during the 1970s the US experienced a double-digit inflation rate , something it nearly replicated during the Powell Fed which suggests that Mr. Powell may have abandoned the Price Rule operating procedures. Viewed from this perspective, his subpar performance relative to that of the Volker Fed is easily understood.

You must have an active account to view these reports. You may register for a trial here

Download Complete Report in PDF Format

Download Complete Report in Word Format