Inflation is just when prices go up, for whatever reason. Increased supply of money can cause it (and does more often than not), but decreased supply can also do that as it moves the price equilibrium. Unfortunately we have a bit of both at the moment, money supply shot up and lots of supply chains slowed down.
Inflation has to do with purchasing power of a dollar decreasing. I would argue that inflation is something measured at the scale of the entire economy, and you can't say much about inflation looking at a single commodity, or even a single sector.
It's is often talked about that way: Wikipedia at least defines it as a general price increase. And that still gives you many of the same effects as a money-supplu-triggered inflation. Many annuities are worth less. The dollars in a savings account are worth less. The minimum wage becames worth less...
No, inflation has to do with the price of goods and services. Inflation is defined as "a general increase in prices and fall in the purchasing value of money".
Inflation can be caused by many things: reduced supply, increased demand, expectation of future price increases, degradation in the quality/desirability of alternative products (eg bond yields), and, yes, an increase in the amount of dollars chasing an asset class/product/service.
Re: your original question, to be a bit pedantic, the supply of money on its own cannot cause inflation in consumer goods except via extremely odd channels (e.g., inflation expectations). A trillion dollars sitting in a bank account has approximately no effect on prices. Like a bullet in a chamber, money at rest has no effect on consumers' experience of inflation until it's propelled forward.
But it's important not to conflate causes with definitions. Also, attributing causes of inflation to particular instances of inflation is often extremely and inherently political. The inflation we've seen in consumer goods is a complex phenomenon with many disparate causes. Beware of anyone selling you a "just-so" story for the cause of inflation in a few dozen disconnected goods and services.
Especially if that story aligns perfectly with their ideology/product/investment/political campaign.
And even more especially if they start the story by conflating one possible cause of inflation with the very definition of the thing.
There is really three types of inflation:
1. Demand driving higher prices
2. Increased cost driving higher prices
3. Expectation of inflation driving higher prices and this inflation itself
If the supply of these chips causes a loss in supply of in demand items, like cars, then it will cause an increase in the price of cars.
The thoughts are that this is temporary, until the components that are in low supply can catch up and meet the demand.
But if the lack of supply lasts for too long then people become used to the increase price and manufacturers can just keep the price there at the inflated price. Now it's permanent inflation. Or that can happen if the supply doesn't keep up with the demand.
Kind of both? If I were to come up with a formula, I'd say 'prices = GDP / SupplyOfGoods', where GDP is just 'MoneySupply * MoneyVelocity'.
If supply goes down, prices go up. If money supply grows, prices go up. If money velocity (number of times money changes hands in a given period) goes down, prices go down, etc.
(It's worth noting that in 2020 when money supply exploded, money velocity fell by a lot, which is why GDP fell, and why there wasn't that much inflation)
People think of inflation like they think of the oceans. If the ice caps melt and water melts in, the shore lines from New York to Tokyo rise slightly. If you track this rise, that's inflation. That's not how it works, and it's not what the CPI tracks. Inflation is much more analogous to inland water, you know, lakes and rivers.
If you give the bottom 80% of the income distribution more money, they will spend it right away like a river. If you give the 81-90%, portion of it will be saved in their lake(say, a 401k) and they will spend some of it. And if you give the top 10% more money, they save all of it in their reservoir.
The way that we have been introducing new money into the system is not by melting ice in the middle of the ocean. We also haven't been raining all over. The key way that new money has been introduced over the past 50 years is by lowering the interest rate. When you lower the interest rate, what happens is that people refinance, and suddenly they can pay less, but quickly realize, oh, I can also borrow more, so they do.
I'll show you a few numbers, which I got by going to the zillow housing affordability page with default settings. I only modified the interest rate, all other values stay the same.
Year | Average Interest Rate 30 Year Fixed | Home you can Afford
1981 | 18.39 | $124,797
1991 | 9.00 | $200,862
2010 | 6.26 | $244,531
2020 | 2.67 | $328,569
And so what we see people and REITs and companies doing is taking out larger and larger loans, and putting those dollars into assets. Companies take out a bond and buy back their own stock. And why wouldn't they, it's profitable because the environment makes it so. And that money flows throughout the system. We can track the inflow of all of this money by looking at say.. the M2. This seems to be the crux of your point, if the amount of money in the M2 has gone up by 40x since 1971, why is inflation not out of control?
The CPI is a measure for inflation that does not track the oceans water level. The M2 tracks that, and as you can see the M2 is out of control. The CPI doesn't track stock purchases. If the CPI were to track stocks weighted at 1971 levels, inflation WOULD be out of control. The CPI tracks, specifically, an average of tangible items that the bottom 80% spends their money on. Therefore the inflation number is based on the height of certain rivers. Now that's an important figure to keep in mind, after all if you get inflation in that bracket and income isn't rising, you quickly run into a revolution. And so that's what the FED has found, if you track the CPI you get the perfect amount of heating to boil the frog without them noticing.
But when you introduce money into the system by lowering interest rates, you are in effect giving the money in proportion to the assets already owned. Someone bought that home in 1981, and someone with the same exact income would bid 328k for it today. You basically tripled(and it was a leveraged sale, so 15x!) that home owners asset, without any need to compare anything else, like actual income rises, or for instance SF has moved upmarket which would also effect prices. And so if you don't have much assets, it's a desert. If you do, it's a rain forest. And because the wealthy already have all that they want, demand for those items that the bottom 80% spend their money on doesn't change. So the supply and demand of those items don't change. So the CPI value stays the same. But money was introduced. If you take a look at the velocity of the M2, the M2V, you can see this take place. The wealthy get the gains of the new M2 dollars, and store it away. The more dollars created, the lower the velocity.
The lower the velocity, the lower inflation. But that rain is being stored in the reservoirs. If inflation causes stored wealth to lose value it's like a dam bursts and the wealthy start to spend and not save their money, it starts as a trickle and ends in a tsunami.
