Gold bugs like Ron Paul like to argue that economists have conflated inflation with price inflation. Paul says that inflation is, by definition, growth in the money supply. Some thoughts based on this perspective:
- By this analysis, assuming a 1-to-1 direct relationship between an increase in the supply of money and an increase in inflation (see below for why this is silly), we would have experienced an annual rate of inflation of about 1.5 percent per year in the postwar period if our money was gold. This is the rate at which the global gold supply has expanded. Also, while expanding at a fairly stable rate, the supply of gold has sometimes unexpectedly changed. We would have inflation and uncertainty in Ron Paul’s utopia.
- Price inflation has been quite low for the past decade. Since 2000, the CPI has gone up about 2.5 percent per year on average. Core inflation, which excludes food and energy, has gone up 2 percent per year over this span. The Fed thinks core inflation is a more appropriate measure for their purposes because they can control it more directly than they can headline inflation.
- Food and energy prices have been extremely volatile. Gold standard advocates such as Paul argue that such volatility is caused by the Fed; meanwhile, the Fed maintains that the shocks on these prices are outside of their control. Here’s a chart of oil price pressures over the past two decades; you decide which story is more plausible. (A similar chart could be made for food prices.)
- There are libraries of ink spilled over the relationship between money supply and inflation, but two things are clear. There is a relationship between how much money is in an economy and how much things cost, but that relationship is not very easy to track because price changes are influenced by many things other than the supply of money. Gold standard advocates understand this, but their rhetoric often makes it seem as though the Fed is the lone villain behind price inflation. Observe, then, the relationship between the quantity of money in the economy and price changes since 1980.
- Price inflation in the wake of QE-1 and QE-2 has risen from near zero, but inflation in general has been especially low, something that gold bugs, with their sole emphasis on the relationship between money supply inflation and price inflation, have yet to explain.