Most of Wall Street Points to High Oil Prices as the Driver of Inflation. A Maverick Johns Hopkins Economist Says They’re Chasing the Wrong Culprit

Why It Matters

If policymakers focus on oil prices instead of credit conditions, they may miss the primary driver of inflation, leading to ineffective monetary tightening and prolonged price pressures.

Key Takeaways

• Wall Street links March CPI 3.3% rise to oil price surge.
• Steve Hanke attributes inflation to rapid money‑supply growth, not oil.
• Commercial bank credit expanded 6.6% YoY in February 2024.
• Japan’s 1970s inflation fell after tightening money supply despite oil shocks.
• Hanke warns that loose credit will keep U.S. inflation above 2%.

Pulse Analysis

The latest CPI report showed a 3.3% year‑over‑year increase in March, prompting a chorus of Wall Street voices to point to the recent oil price rally sparked by Iran’s closure of the Strait of Hormuz. Analysts argue that higher gasoline, plastics and fertilizer costs will keep headline inflation elevated until the geopolitical tension eases. This narrative aligns with a long‑standing view that commodity shocks transmit directly to consumer prices, especially when the economy is already vulnerable to supply‑chain disruptions.

Contrasting that view, Johns Hopkins professor Steve Hanke, a staunch monetarist, contends that the real engine of inflation is the rapid expansion of the money supply, driven largely by commercial banks. He notes that bank‑originated credit grew at a 6.6% annualized pace in February, outpacing the Federal Reserve’s own balance‑sheet contributions. Hanke points to the 1970s Japanese experience, where aggressive monetary tightening halted inflation despite a severe oil crisis, underscoring that credit conditions, not oil, dictate the overall price level. His analysis suggests that the current inflation trajectory was set well before the Gulf tension, reflecting a lagged response to excess liquidity.

For policymakers, the debate has practical consequences. If the Federal Reserve continues to target oil‑related price spikes, it may overlook the more persistent pressure from loose credit, risking either premature rate cuts or insufficient tightening. Market participants should monitor banking‑sector lending trends and regulatory signals as leading indicators of inflationary risk. Recognizing money‑supply dynamics could sharpen forecasts and guide more calibrated policy actions, ensuring that the fight against inflation addresses its true source rather than a fleeting commodity shock.