Almost, but not quite.
Back in the days when dinosaurs roamed the earth, and Cambridge economists kept guard at the Temple of Keynes, Milton Friedman’s focus on inflation as a monetary phenomenon was a revelation—and an excellent one. Next to Joan Robinson’s surreal claims that printing money was not responsible for the German hyperinflation, Friedman’s version of monetary economics provided a very healthy dose of sanity. And as central banks across the world learned from the mistakes of the 70s and brought inflation under control, it became clear that the monetary authority indeed had the power to contain the price level via control of the money supply.
But it’s important to know what this account leaves out: how, exactly, do prices adjust? And over what length of time does this happen?
The modern view, backed up by impressive (though not entirely conclusive) empirical evidence, is that most prices are “sticky”, meaning that price-setting is staggered over time. Of course, not all prices adjust in the same way: some are especially sticky, while a few change almost every day—gas prices being the most salient example for consumers.
What happens if, say, there’s turmoil in the Middle East and oil prices suddenly shoot up? We see a sudden uptick in many conventional measures of inflation (though not necessarily in the ones that are relevant to macroeconomic stabilization).
But does this have anything to do with monetary policy? Not really. What’s happening is a relative price change: a supply shock changes the equilibrium price of oil worldwide, and oil is suddenly worth more vis-à-vis other goods and services. Since the price of oil is far less sticky than the price of other goods and services in the economy, this relative adjustment manifests itself in nominal prices in a one-sided way: other prices stay more or less the same, while oil prices skyrocket to whatever level is necessary to clear the market. We see an increase in the overall price level.
And in the short run, this is an increase that the Fed is almost powerless to stop. Unless it sets policy to be overwhelmingly tight—pushing the fed funds rate through the roof, employment consequences be damned—it can’t induce prices other than oil to fall quickly enough to offset the increase from oil over a short timeframe. As a result, we see occasional sudden spikes in the CPI (though also sudden drops!).
This isn’t some failure of monetary policy: it’s the natural consequence of a world where some prices are sticky and others are not. Any attempt to undo it would force the Fed to make wild adjustments in monetary policy, leading to a far less stable economy for all of us.