The morning of April 10 brought fresh data from the Commerce Department, revealing that consumer prices in March had climbed 3.3% year-over-year. This figure immediately prompted a flurry of reactions from Wall Street, with analysts, strategists, and economists largely converging on a single explanation: the surge in oil prices, exacerbated by Iran’s closure of the Strait of Hormuz, was the primary culprit behind the “hot” consumer price index (CPI) reading. The prevailing sentiment suggests that as long as gasoline costs and prices for petroleum-derived products – from plastics to fertilizers – remain elevated, inflation will continue to exceed the Federal Reserve’s target of 2%. These experts invariably predict a sharp decline in the inflation curve once the geopolitical conflict subsides.
However, a dissenting voice has emerged, challenging this widespread conviction. Steve Hanke, a veteran professor of applied economics at Johns Hopkins University and a self-described “hardcore monetarist,” argues that the financial establishment is misdiagnosing the root cause of the current inflationary pressures. Known as “the Money Doctor,” Hanke dismisses the notion that rising oil prices are the fundamental driver, despite the apparent correlation. He firmly states that while oil and inflation may appear linked, one does not necessarily cause the other. Hanke was notably unsurprised by the 3.3% March CPI figure, pointing out that the three-month annualized rate in February had already reached the same mark. He contends that inflation was accelerating before the recent conflict and will continue its upward trajectory even after the war concludes and oil prices eventually recede. To him, “the genie is clearly out of the bottle and won’t be put back in anytime soon.”
Hanke’s central argument posits that the true determinant of overall price levels lies in the growth of the money supply, not in isolated price shocks like those currently affecting energy markets. He explains that if consumers spend more on expensive gasoline and other oil products, they inherently have less disposable income for other expenditures such as rent or dining out. Supply-chain disruptions, in his view, merely alter relative prices without impacting the broader inflationary trend. The real issue, he asserts, is the explosion in the money supply, a phenomenon that aligns squarely with monetarist economic theory. Hanke highlights the crucial role of commercial banks in this process, noting that they are responsible for creating approximately 80% of new money, with the Federal Reserve accounting for the remaining 20%. The significant surge in banking credit, he believes, is directly pushing prices higher. He also emphasizes that an increase in the money supply typically translates into higher prices only after a considerable lag, a monetary expansion that began over two years ago and whose consequences he has been anticipating.
Remarkably, Hanke observes that the Fed appeared to be on a path to curbing inflation in 2023, when commercial credit generated by banks was actually contracting. Yet, this trend dramatically reversed course the following year, turning positive in March of 2024 and accelerating to a rate of 6.6% by February. This, Hanke argues, represents an “enormous increase,” far exceeding the level consistent with achieving the Federal Reserve’s 2% inflation target. He attributes this renewed surge in the money supply predominantly to bank lending, suggesting that banks expanded their lending activities in response to signals from the administration regarding loosened regulations and reserve requirements.
To bolster his case, Hanke draws parallels to historical episodes, particularly the significant price surge experienced in the United States during the 1970s. He maintains that this inflationary period stemmed from monetary excess, not solely from the severe oil crises of that era. For instance, before the second major oil shock in 1979-1980, the money supply was growing at a rapid 11.2%, double the rate consistent with 2% CPI, which subsequently led to 13.2% inflation. Had monetary growth been more restrained, Hanke contends, the dramatic rise in prices would not have occurred.
Further evidence for Hanke’s perspective comes from Japan’s experience during the same period. In 1974, the first oil shock, triggered by the Yom Kippur War, was widely blamed for propelling inflation from 4.9% to 23.2%. However, Hanke argues the true cause was laid in mid-1971 when the Bank of Japan aggressively expanded the money supply by 25.2%. Crucially, in July 1974, the Bank of Japan reversed its policy, halving the pace of money expansion. By 1978, inflation had fallen to 4.2%. When the Iranian Revolution sent oil prices soaring again that year, Japan’s monetary restraint, in stark contrast to the U.S. approach, kept prices in check, with inflation actually declining to 3.7%. Hanke views this Japanese example as a “natural experiment,” demonstrating that even significant oil shocks can be mitigated by prudent monetary policy. He laments that the U.S. has seemingly failed to learn from these historical lessons, warning that allowing the money supply to run unchecked will continue to fuel inflation regardless of developments in the Gulf. While the current oil crisis may eventually subside with the end of conflict, the inflation predicament, in his view, has deeper, more persistent roots.
