There are many excuses often used to explain inflation. However, the fact is that there is no such thing as “cost push inflation” or “commodity inflation.” Inflation is not an increase in prices, it is the destruction of the purchasing power of the currency.
Cost-push inflation is more units of currency going to relatively scarce real assets. The same can be said about all other, from commodities to demand and my favourite, “supply chain disruption”. More units of currency going to the same goods and services.
The monster inflation we have endured these years first arrived through asset inflation and then through consumer prices. Now, governments and statistical bodies are tweaking the calculation of CPI to disguise the loss of purchasing power of the currency and central banks had to hike rates after the disaster created in 2020, when the massive increase in money supply went to finance bloated government spending and created the mess we live today.
Central banks know that inflation is a monetary phenomenon and that is why they are hiking rates and tightening as fast as governments allow them. However, central banks have lost a significant amount of an already low credibility by first ignoring the inflation risk and later using the base effect and transitory excuse, only to react late and slowly.
This has happened in a world where the excess in money supply growth has a number of back-stops and limits that prevent a massive increase in consumer prices through the destruction of the artificially printed currency. With quantitative easing there are a number of limits that stop inflationary pressures: As the transmission mechanism of monetary policy is the banking channel, it is our demand for credit what puts a break on inflationary pressures.
The only thing that saves citizens from much higher prices is the fact that the transmission mechanism of monetary policy is independent and diversified. Now imagine for a second if that transmission mechanism was direct and had only one channel, the central bank itself.
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A central bank digital currency would be issued directly to your account within the central bank. As such, it is surveillance disguised as money. The central bank would know exactly what you use the currency for, how much you save, borrow, and spend and where. It can make the currency fungible to avoid the ludicrous but often repeated “problem” of “excess savings”. Furthermore, with increasingly political central banks, they may even penalize those who spend in a way that they deem inappropriate of benefit those that do what they recommend. The entire privacy system and monetary limit mechanism would be eliminated. Even worse, when the central bank makes the mistake of printing way too much money as they did in 2020 the impact on consumer prices would be direct. With an increase in money supply that exceeded 20% in a year, we would be suffering close to 20% levels of inflation as the limits to the transmission mechanism are destroyed.
Read More: Central Bank Digital Currencies Would Bring Hyperinflation