<p>Government has always some degree of control over inflation in a country. For example, consider simple New Keynesian model of money market equilibrium given by:</p>
<p><span class="math-container">$$M/P = L(Y,i)$$</span></p>
<p>Where <span class="math-container">$M$</span> is money supply, <span class="math-container">$P$</span> price level (positive change of which is inflation <span class="math-container">$\pi$</span>)  <span class="math-container">$L$</span> demand for loanable funds, <span class="math-container">$Y$</span> real output and <span class="math-container">$i$</span> interest rate.</p>
<p>Solving  for <span class="math-container">$P$</span> we get:</p>
<p><span class="math-container">$$P= \frac{M}{L(Y,i)}$$</span></p>
<p>Even if there is an exogenous inflation shock (e.g. supply chain issue causing drop in <span class="math-container">$Y$</span>) government doesn't have to just passively stand and let the shock cause inflation. Government has option of increasing interest rate (interest rates are controlled by central banks which are government institutions), or government could restrict money supply <span class="math-container">$M$</span> again something that central bank could do (this could also be restricted by government borrowing less since the way how US central bank is set up institutionally it can create new <span class="math-container">$M$</span> by purchasing government debt so restricting gov borrowing would also restrict <span class="math-container">$M$</span> growth).</p>
<p>Inflation doesn't have much to do with trade per se (if one country has high inflation rate that will change the exchange rage and won't necessarily cause inflation in second country, there could be some inflation slipovers sometimes from country to country via trade but they are generally not major determining factor of inflation). You see inflation in many countries around the world because many countries are following the same fiscal and monetary policies. For example, almost every country in the world responded by strong fiscal stimulus to the covid19 crisis, and almost every country funded this fiscal stimulus by large increases in <span class="math-container">$M$</span> (see <a href="https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19" rel="nofollow noreferrer">IMF review</a> of government responses around the world). Also since 2008 many countries slashed <span class="math-container">$i$</span> to (or close to) zero. If all countries pursue similar policies then you will get similar results.</p>
<p>However, it is really silly to try to blame single politician or technocrat for that. Its not like Jerome Powell just sets monetary policy, and Joe Biden fiscal policy at a whim. In Fed monetary decisions are taken by the Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC). When it comes to spending decisions of US (and how their are financed) that is ultimately decided by US congress. Trying to blame single or few people for current US or EU inflation would be equally foolish as trying to blame single or few banks for 2008 financial meltdown.</p>

CC BY-SA 4.0
2022-06-15T20:20:24.620Z
I think your second-to-last paragraph really explains what I'm trying to figure out here - it seems like inflation is less tied to the capital output of a country, and more tied to the policy of adjustments in Money Supply and Interest Rates - which are now seeing a major adjustment after years of policy focused on mitigating COVID-related economic impact.
Zibbobz
CC BY-SA 4.0
2022-06-15T20:28:08.097Z
@Zibbobz inflation also depends on real output Y  (capital output would be only share of Y produced by capital), but the point is no matter what happens to Y (supply chain issues etc) government can still react in a way that lowers inflation. For example, suppose that supply chain issues, ceteris paribus, would currently cause 5\% inflation. Government could always try to respond by hiking interest rates by lets say 3-6\% and it would offset the supply side shock to the economy. The problem is that fighting inflation (e.g. hiking interest rates/reducing M and monetary financing of fiscal
1muflon1
CC BY-SA 4.0
2022-06-15T20:29:16.520Z
spending) is not very popular and temporarily might deepen recession, so there often is little will to fight inflation. Also btw one thing that people often forgot to mention that supply chains are disrupted precisely because of government covid response. Ports are clogged at least partially because of all the testing, lack of employees/truckers (at least partially caused by mandates), so in that sense it would be correct to say it all comes back to covid19 and how we decided to respond to it.
1muflon1
CC BY-SA 4.0
2022-06-15T19:19:11.090Z
2022-06-15T19:34:40.107Z
2022-06-15T19:34:40.107Z
1muflon1
<p><a href="https://politics.stackexchange.com/questions/73639/what-is-the-reason-for-the-high-us-inflation-rate-in-2022">This</a> recent question on politics.se is asking about the cause of high inflation in the United States. One of the statements made in the question is:</p>
<blockquote>
<p>...since many countries are also experiencing high inflation rate, I'm not super convinced that US high inflation is because of [domestic leaders].</p>
</blockquote>
<p>But given that the United States is a world superpower that has many trade relations with foreign  powers, is there really any evidence to suggest that the rising inflation rates in the US are not related to the high inflation rates of its financial partners?</p>

CC BY-SA 4.0
2022-06-15T20:49:47.237Z
This [answer](https://economics.stackexchange.com/a/51742/40033) to a question about lack of forecasting quality of inflation makes some food points in my opinion. The majority of disruptions comes from supply side issues at the moment. Yes, ultimately inflation is always a monetary phenomenon, but energy prices (one of the major sources) almost surely did not rise because of money supply.
Alex
CC BY-SA 4.0
2022-06-15T20:52:18.920Z
Seems people forget all too quickly that Trump frequently [complained](https://www.nytimes.com/2019/06/24/business/economy/federal-reserve-trump.html) that the FED is raising interest rates. Following his logic, monetary stimulus would even be higher (and still unlikely be the cause for high energy prices and supply chain disruptions).
Alex
<united-states><inflation><macroeconomics>
Are High Inflation Rates In Foreign Countries Unrelated to High Inflation Rates In The United States?
Zibbobz
# Are High Inflation Rates In Foreign Countries Unrelated to High Inflation Rates In The United States?

(Asked by: username_0 on 2022-06-15)

[This](https://politics.stackexchange.com/questions/73639/what-is-the-reason-for-the-high-us-inflation-rate-in-2022) recent question on politics.se is asking about the cause of high inflation in the United States. One of the statements made in the question is:

> ...since many countries are also experiencing high inflation rate, I'm not super convinced that US high inflation is because of [domestic leaders].

But given that the United States is a world superpower that has many trade relations with foreign powers, is there really any evidence to suggest that the rising inflation rates in the US are not related to the high inflation rates of its financial partners?

**Tags:** united-states, inflation, macroeconomics
> **Comments:**
> **username_1**: This [answer](https://economics.stackexchange.com/a/51742/40033) to a question about lack of forecasting quality of inflation makes some food points in my opinion. The majority of disruptions comes from supply side issues at the moment. Yes, ultimately inflation is always a monetary phenomenon, but energy prices (one of the major sources) almost surely did not rise because of money supply.  
> **username_1**: Seems people forget all too quickly that Trump frequently [complained](https://www.nytimes.com/2019/06/24/business/economy/federal-reserve-trump.html) that the FED is raising interest rates. Following his logic, monetary stimulus would even be higher (and still unlikely be the cause for high energy prices and supply chain disruptions).  

---

## 1 answers

### Answer by username_2 on 2022-06-15. Score: 2 | Accepted answer

Government has always some degree of control over inflation in a country. For example, consider simple New Keynesian model of money market equilibrium given by:

$$M/P = L(Y,i)$$

Where $M$ is money supply, $P$ price level (positive change of which is inflation $\pi$) $L$ demand for loanable funds, $Y$ real output and $i$ interest rate.

Solving for $P$ we get:

$$P= \frac{M}{L(Y,i)}$$

Even if there is an exogenous inflation shock (e.g. supply chain issue causing drop in $Y$) government doesn't have to just passively stand and let the shock cause inflation. Government has option of increasing interest rate (interest rates are controlled by central banks which are government institutions), or government could restrict money supply $M$ again something that central bank could do (this could also be restricted by government borrowing less since the way how US central bank is set up institutionally it can create new $M$ by purchasing government debt so restricting gov borrowing would also restrict $M$ growth).

Inflation doesn't have much to do with trade per se (if one country has high inflation rate that will change the exchange rage and won't necessarily cause inflation in second country, there could be some inflation slipovers sometimes from country to country via trade but they are generally not major determining factor of inflation). You see inflation in many countries around the world because many countries are following the same fiscal and monetary policies. For example, almost every country in the world responded by strong fiscal stimulus to the covid19 crisis, and almost every country funded this fiscal stimulus by large increases in $M$ (see [IMF review](https://www.imf.org/en/Topics/imf-and-covid19/Policy-Responses-to-COVID-19) of government responses around the world). Also since 2008 many countries slashed $i$ to (or close to) zero. If all countries pursue similar policies then you will get similar results.

However, it is really silly to try to blame single politician or technocrat for that. Its not like Jerome Powell just sets monetary policy, and Joe Biden fiscal policy at a whim. In Fed monetary decisions are taken by the Fed’s monetary policymaking body, the Federal Open Market Committee (FOMC). When it comes to spending decisions of US (and how their are financed) that is ultimately decided by US congress. Trying to blame single or few people for current US or EU inflation would be equally foolish as trying to blame single or few banks for 2008 financial meltdown.

> **Comments:**
> **username_0**: I think your second-to-last paragraph really explains what I'm trying to figure out here - it seems like inflation is less tied to the capital output of a country, and more tied to the policy of adjustments in Money Supply and Interest Rates - which are now seeing a major adjustment after years of policy focused on mitigating COVID-related economic impact.  
> **username_2**: @Zibbobz inflation also depends on real output Y  (capital output would be only share of Y produced by capital), but the point is no matter what happens to Y (supply chain issues etc) government can still react in a way that lowers inflation. For example, suppose that supply chain issues, ceteris paribus, would currently cause 5\% inflation. Government could always try to respond by hiking interest rates by lets say 3-6\% and it would offset the supply side shock to the economy. The problem is that fighting inflation (e.g. hiking interest rates/reducing M and monetary financing of fiscal  
> **username_2**: spending) is not very popular and temporarily might deepen recession, so there often is little will to fight inflation. Also btw one thing that people often forgot to mention that supply chains are disrupted precisely because of government covid response. Ports are clogged at least partially because of all the testing, lack of employees/truckers (at least partially caused by mandates), so in that sense it would be correct to say it all comes back to covid19 and how we decided to respond to it.  

---

