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2.4 Trillion Reasons to Keep an Eye on Inflation

Our Summer Speaker Series last week featured our research fellow, Jia Liu, speaking about her research to develop a forecast for inflation.

The series focuses on taking complex matters, and boiling them down into explanations the average American consumer can understand. During her lecture last Tuesday, Liu provided a simple definition of inflation: the growth in the general level of prices.

For a consumer, inflation is generally a bad thing, since people don’t want to pay higher prices, she said. “But if you’re a producer, instead of being a consumer, higher prices could mean something good. With higher prices, you’ll be able to make more revenue,” she said.

She demonstrated how the model she built for AIER, applied retroactively to consumer price information, did a pretty good job of predicting how much prices would rise or fall. Using the model to predict inflation, using historical data, is a tool to test how well the model performs, and the model does very well in those tests. Using that model to project inflation, the model is projecting mild inflation for the next six months.

But she discussed one factor that could have unexpected results. Because of the Federal Reserve’s quantitative easing program that followed the financial crisis, there remains currently $2.4 trillion sitting in banking reserves, she said. If that money suddenly was spent, that would add 19 percent to the current money supply of $12.6 trillion, she said.

“Just think about it. The bank can loan them out if they can find borrowers. If all these excess reserves get loaned out in the future, that would create immediately 19 percent inflation,” Liu said.

You can see her entire lecture  at this link. Our series continues tonight at our Great Barrington, Massachusetts headquarters. Our Patrick Coate will speak about why Americans are moving less for jobs. The event is open to the public, but reservations are preferred. Read more about the series here.

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