Fed Misfires at Inflation's Shadow

The Federal Reserve is being criticized for its response to rising oil prices and inflation. According to some economists, the Fed is 'shadowboxing' by fighting the wrong enemy, price shocks caused by oil price increases. Inflation, on the other hand, is a monetary phenomenon caused by an increase in the money supply and credit.

As economist Milton Friedman said, 'Inflation is always and everywhere a monetary phenomenon.' The current M2 metric shows inflation running around 5 percent right now. However, the Fed's focus on oil prices has led to a quarter-point interest rate hike, which some argue will have little impact on energy costs.

Economist Daniel Lacalle pointed out that policymakers often try to center arguments around individual prices rather than aggregate prices. He noted that if an oil shock were causing inflation, we would see deflation instead of rising prices for other goods and services.