High Inflation May Already Be Behind Us

High inflation has captured the headlines as of late particularly as CPI recently hit the highest levels since 1981. Some are even suggesting we will face hyperinflation. However, while inflation is certainly present, the question to be answered is whether it will remain that way, or if the worst may already be behind us?

To answer that question, let’s define the difference between an inflationary increase and hyperinflation.

Not surprisingly, as Milton Friedman stated,

Inflation is always and everywhere a monetary phenomenon. It is always and everywhere a result of too much money, of a more rapid increase of money, than of output. Moreover, in the modern era, the important next step is to recognize that today the governments control the quantity of money so that, as a result, inflation in the United States is made in Washington and nowhere else.

Milton Friedman’s statement is backed up by the chart below of the M2 money supply compared to inflation (with a 9-month lag).

High Inflation, High Inflation May Already Be Behind Us

So, where did that surge in the money supply come from? Massive government bailout programs sent money directly to households that far exceeded economic activity. With production shutdown, demand dwarfed supply.

High Inflation, High Inflation May Already Be Behind Us

However, what we are experiencing is high inflation. “Hyperinflation” is not a threat. At least not yet.