In 2021, inflation (understood to mean a rise in prices) began to rise sharply. One explanation of this phenomenon is that supply shocks (decrease in supply of goods) were responsible. That makes sense---less supply = higher price on a supply-demand graph. The other explanation was that the addition of new money (increase in supply of money) led to the inflation. That also makes sense. So is there any way of knowing which explanation is correct?
Well, of course, both explanations could be correct. Both supply shock and monetary loosening could have been at work simultaneously to create the humongous inflation of recent years. However, I think the following can also be said: if supply shock were the only factor, one would expect that prices would return to pre-shock values. Granting that some degree of supply shock probably occurred, if prices don't return to pre-shock levels, then that is attributable to increase in the supply of money.
Right?
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