Playing with this idea that inflation is always and everywhere a monetary phenomenon… one would expect a very high correlation between the federal funds rate and the inflation rate. Also for shits and giggles let’s throw in the price of energy in the United States.
Here are my correlation coefficients:
| CPI | Energy | Fed Funds | |
| CPI | 0.699622 | 0.714027 | |
| Energy | 0.282622 | ||
| Fed Funds |
and what if we put in a 6 month lag?
| CPI | Energy | Fed Funds | |
| CPI | 0.467863 | 0.717891 | |
| Energy | 0.282622 | ||
| Fed Funds |
Now… I don’t want to be brash here… but when I see a correlation of 70%, I don’t immediately think it must be a causal relationship like Milton Friedman claims. I think such claims are wrong, and this data shows that inflation cannot be an inherently monetary phenomenon.
Source:
https://fred.stlouisfed.org/graph/?g=VxU2