Following the Commerce Department’s report that consumer prices rose by 3.3% year over year in March, Wall Street analysts have largely pointed to escalating oil prices as the primary driver of inflation. However, Steve Hanke, a professor of applied economics at Johns Hopkins University, argues that this widespread analysis misses the mark.
The Monetarist Perspective
Everyone’s been writing about how oil prices are causing inflation. It only looks that way. The two are correlated, but the first doesn’t cause the second at all,” says Hanke.
Hanke, known for his monetarist views, contends that the true culprit behind rising prices is the explosion in the money supply, not price shocks from oil. He points out that inflation was already accelerating prior to the geopolitical tensions that spiked oil prices and predicts it will continue even after oil prices stabilize.
Bank Lending and Monetary Policy
According to Hanke, commercial banks are responsible for 80% of new money creation, with the Federal Reserve accounting for the remaining 20%. He underscores that a significant increase in commercial credit, which entered positive territory in March 2024 and reached 6.6% by February, is pushing prices upward. This surge in bank lending follows the Administration’s signal to loosen regulations and reserve requirements.
Hanke draws parallels to Japan in the 1970s and the U.S. during the same decade, where loose monetary policy, rather than oil crises, fueled inflation. He argues that had money supply growth been moderate, the sharp rise in prices could have been avoided.