Today's Inflation Is 'Transitory.' The Fed Just Doesn't Know Why It Is
AP Photo/Andrew Harnik, File
Today's Inflation Is 'Transitory.' The Fed Just Doesn't Know Why It Is
AP Photo/Andrew Harnik, File
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The original Xerox copier model was the legendary 914. One of them is in the Smithsonian today. It weighed 650 pounds, could make 100,000 copies a month, and 7 copies per minute. The price to own this rather monstrous piece of machinery that rendered Xerox the Apple of its time was $27,500.

How things change. Not only is Xerox a monument to past innovation, copiers are much faster and cheaper today. The purchase of most any laser printer gets the buyer not just a printer, but a color copier. As opposed to $27,500 (most eventually rented for $25/month, 10 cents per copy), color printers with copying capabilities that surely exceed the speed of the 914 set the buyer back somewhere in the range of a few hundred dollars, and they weigh a small fraction of 650 pounds.

All innovations start out expensive, rich “venture buyers” (the agency in Mad Men famously kept a 914 in office to impress clients) purchase what few have the means to on the way to establishing the worth of the market good, at which point entrepreneurs matched with savings get to work mass producing the former luxury. Once a signal of a company or organization enjoying great success, copiers in modern times are commonplace.

Economists say economic growth causes prices to rise, but growth results from investment being directed toward entrepreneurs on the way to abundance, and declining costs of everything. It’s all a reminder that economic growth is the surest sign of falling, not rising prices.

This is worth remembering now as media outlets claim “consumer demand” is causing inflation. They misunderstand what inflation is. In any economy prices are rising and falling all the time. The latter is an expression of consumer preference. Prices merely organize an economy, and the price fluctuations produce precious information for producers about what consumers want and don’t want.

In a price level sense, if demand for strawberries outstrips supply such that prices rise, demand for other fruits and other goods logically must decline. Price fluctuations are in no way inflationary or deflationary. Declining copier prices weren’t a sign of deflation as much as they freed up spending power for other goods and services.

But since price rises allegedly caused by inflation are all the rage today, it’s worth pointing out again that demand doesn’t cause inflation. A soaring price for anything is merely a summons for production that is made possible once again by investment being paired with entrepreneurs and businesses. High prices that result from soaring demand are the surest sign of falling prices made possible by investment in enhanced production techniques that enable more of what’s heavily demanded to be produced with fewer hands, fewer machines, or both. Again, economic growth signals falling prices for goods and services. Economists and their media enablers get it backwards.

So what is inflation? Inflation is a decline in the exchangeable value of the unit. In our case it’s a decline in the exchangeable value of the dollar.

We in the U.S. marketplace generally work for dollars, but what we’re really working for are what dollars can be exchanged for. This is important mainly because sometimes politicians in thrall to economists buy into the something-for-nothing notion that dollar devaluation is the path to prosperity. Supposedly devaluation makes our goods more competitive globally. Except that it doesn’t.

The only closed economy is the world economy. Money that’s shrunken leads to rising production costs owing to the simple truth that all production springs from global cooperation and inputs produced globally.

Furthermore, consider what brings on falling prices in the first place: it’s investment that results from savings. Savers are by their descriptor delaying exchange of money for goods now with an eye on exchanging more money for more goods and services in the future. Which speaks to the many problems of devaluation.

Not only does currency shrinkage eviscerate the value of our work right away thanks to dollars not stretching as far as they once did, that same shrinkage is an investment deterrent. Investors seeking future returns in dollars won’t be as likely to invest if any returns will come back in dollars exchangeable for less.

It’s all a sign that as opposed to it being a consequence of soaring economic growth as economists and media members will tell you, inflation is the surest sign of economic contraction. Yes, it’s when prices are broadly rising, and worse, it’s when broad prices are falling the slowest, that we know we’re suffering slow growth born of slow investment.

Consumption doesn’t power growth as much as it’s the logical result of it. Investment is the sign of economic expansion, but the devaluation that is inflation is an investment deterrent.

Is there inflation now? The view here is that we’ve suffered dollar devaluation for much of the 21st century. A dollar bought 1/260th of the constant that is gold in 2000, while in 2021 it buys 1/1800th. During the 21st we’ve seen oil triple or quadruple, the price of a Wall Street Journal quadruple, dress shirts way up in price, but technology prices have fallen. It’s a lesson to not look at consumer prices which reflect all manner of factors. To blame inflation on rising prices is like blaming rain on wet sidewalks.

Inflation is devaluation. Period. Gold is the historical measure. It’s somewhat flat over the past year, but way up relative to 2014. Basically the changes in the value of the dollar have long been with us.

Inflation isn’t a now thing in other words. The reality is that demand-drive price rises aren’t inflation. What’s happening today is transitory. The sad thing is a Fed that claims the inflation is “transitory” doesn’t know why it is.

John Tamny is editor of RealClearMarkets, Vice President at FreedomWorks, and a senior economic adviser to Applied Finance Advisors ( His new book is titled When Politicians Panicked: The New Coronavirus, Expert Opinion, and a Tragic Lapse of Reason. Other books by Tamny include They're Both Wrong: A Policy Guide for America's Frustrated Independent Thinkers, The End of Work, about the exciting growth of jobs more and more of us love, Who Needs the Fed? and Popular Economics. He can be reached at  

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