Consumer prices rose 7% in 2021, the highest reported inflation rate since 1982. The ugly price data has sparked a debate over how much is linked to supply shortages and conventional inflation related to easy money. The answer may surprise everyone. My research shows that easy money boosted "actual" 2021 inflation as much as supply shortages and bottlenecks did to "reported" inflation.

Suppose we assume that all of the inflation for new and used vehicles & parts, rental cars, household furnishings (appliances, tools, furniture, etc.), apparel, sporting goods, and even the cost of food away from home is due to supply bottlenecks and worker shortages. The cumulative impact from these items is estimated to be approximately 350 basis points or roughly half of the 7% rise in the CPI index.

Now suppose BLS used actual house prices, as they did prior to 1982, to estimate homeowners' housing costs instead of an arbitrary rent series. In 2021, house prices rose 19%, according to the national index published by S&P Core-Logic Case Shiller Composite index, whereas the owners rent index in the CPI rose 3.8%. The owner's rent series has a weight of 22% in the CPI. Adjusting homeowner's costs for actual prices would add roughly 350 basis points to reported inflation.

So it is wrong and misleading to argue that if the pandemic did not occur actual inflation would not spike as much as it did. Easy money contributed to one type of inflation (actual) and the pandemic another type (reported). Policymakers need to focus on the former as housing-related and general inflation ran 7% in 2021.

Economic cycles generally start with positive nominal fed funds rates and very often positive real fed funds. Yet, the current cycle starts with zero nominal rates and sharply negative real rates. As a result, policymakers are compelled to raise official rates to counter inflationary forces and not lower them as has been the common practice during the early stages of an economic cycle. The longer policymakers take to reset monetary policy, the greater risk is to the economy and risk-assets.