Federal Reserve Chairman Bernanke has been hailed as one of the country’s foremost authorities on monetary economics, but that doesn’t necessarily mean Ben is a monetarist. In fact, in Bernanke’s Congressional testimony yesterday, he snubbed the idea the idea that the quantity of money is the ultimate arbiter of inflation’s level.
“FOMC participants project that the growth in economic activity should moderate to a pace close to that of the growth of potential both this year and next year,” Mr. Bernanke said, as reported by the “Should that moderation occur as anticipated, it should help to limit inflation pressures over time.”
History doesn’t necessarily agree, as any card-carrying monetarist will point out. One the clearest examples can be found during a two-year stretch through the first-quarter of 1975. During that period, the economy contracted by 1.6%, with real (inflation-adjusted) GDP falling to $4.24 trillion by March 1975 from $4.31 trillion (in chained 2000 dollars) as of March 1973–a decline otherwise known as a recession. But while the economy stumbled, there was no reprieve from core inflation (less food and energy), which climbed sharply over those 24 months, jumping to a seasonally adjusted annual pace of more than 11% in March 1975 from 3.2% two years previous, as the chart below illustrates.
Since this measure of consumer prices excludes energy prices, we must consider other catalysts for the unleashing of the inflationary dogs at that moment in history. In fact, we find a suspect in money supply, which suspiciously indulged in a sharp burst skyward in the months and years preceding the rapid rise in core inflation during 1974-75. As the chart below shows, seasonally adjusted M2 money supply, based on a rolling 12-month change, exploded upward starting in 1971 through much of 1973. In June of 1970, M2’s 12-month rise was under 3%; by March 1971, it was advancing at a double-digit pace, a trend that was maintained through July 1973.
Monetarists have reason to think that inflation is more than a byproduct of economic growth. Mr. Bernanke thinks otherwise, or so one could reason after sifting through his latest comments. Welcome to the new new age of debating the causes of inflation.