Heating Up

You can make or break
You can win or lose
That's a chance you take
When the heat's on you
And the heat is on
--Glenn Frey

The May consumer price number printed at a 5% year over year rate of increase. That's the fastest annual growth in prices since 2008.

Glass half full folks contend that this is just a transitory situation, reflecting an economy on a post CV19 rebound. One problem with this claim is that policymakers have signaled that they don't intend to reverse the trillion$ of stimulus meant to motivate the recovery. 

With millions of people out of work and sitting on their couches subsidized by money printed out of thin air by Uncle Sam, spreading enough new incremental output to sop up all those new dollars that policymakers plan to keep in the system seems a tall order.

Here's what I mean. Suppose in Period 1 there are 5 million dollars in circulation and 1 million units of production for consumer to buy. The average price = $5 million/1 million units = $5 per unit.

Now, suppose in Period 2, money in circulation increases to $10 million and production expands to 1.5 million units. The average price = $10 million/1.5 million units = $6.67 per unit.

The 'consumer price index' in this case increases by (6.67 - 5) * 100 = 33% from Period 1 to Period 2.

When the production of goods does not keep up with increases in money supply, prices heat up.

And the heat is on.