Why Has Price Inflation Accelerated?

Assume without proof that price inflation has accelerated over the past couple of years, although the supply of money and credit have been growing significantly for a much longer time. At least that is what I have been seeing in the grocery store.

It is widely thought that US price inflation has been restrained by the low cost imports of consumer goods from Asia, from China in particular. It is also thought that the dollars spent for these imports have been in part been added to Chinese currency reserves, helping to keep the exchange value of the dollar up and helping to maintain the affordability of Chinese goods to Americans.

It seems to me to be possible that the increasing of interest rates by the Fed may have been partially self-defeating in that it may have increased the level of Chinese purchases of Government debt, by increasing the opportunity cost to the Chinese of holding dollars instead of debt. When the Chinese buy the debt, the return of the dollars to the US mainland means that price inflation will be higher than if actual dollars were held by the Chinese.

Of course, this theory won't hold any water if the Chinese haven't actually increased their purchase of debt relative to the marginal dollar.

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