Thread by @MMTmacrotrader

What Causes Inflation?

Monetarist normies will tell you government spending & money supply, but they are wrong! Only #MMT understands this, and the data proves it.

So let’s do a little data science to see what the real cause of inflation is!

A thread ...🧵 1/10

Our first step to determine what drives inflation is to plot our candidate inflation variables against CPI (see 1/10) and take a look at the time series. It won’t require a PhD in stats to see there is a correlation between each variable and CPI. So let’s dive deeper. 2/10

To do so, we’re going to run two machine learning analyses, Mutual Information (MI) and Granger Causality. MI will measure the amount of information contained between our variables and CPI, Granger Cause will tell us if our variable time series ‘causes’ the change in CPI.
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First step, we’ll determine MI using @scikit_learn mutual_info_regression:

What does this tell us? Relative to the entire list, Fed Funds contains the greatest amount of information about CPI, but each of our variables tell us far more than our baseline, local temps.
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In other words, these are all reasonably linked with inflation and may be causal drivers of CPI. And that’s where Granger Causality steps in!
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To run Granger Cause we first need to make our data stationary, meaning we need to have the mean and std dev constant and remove seasonality, so now our data now looks like this:
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Now its time to run the Granger Cause test. We’ll use @statsmodels grangercausalitytests which will tell us if our variables are useful for forecasting CPI. And what do we find 🥁:
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10-year yields & Oil Inventory Granger Cause Changes in CPI

Govt Spending, M2, & Fed Funds Do Not Granger Cause Changes in CPI

CPI Granger Causes Change in Deposits
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The results seem to tell the same story that @wbmosler & MMT have long argued. Inflation is a not a function of government spending or money supply increases. But its rates and real output that tell much more of the story than what is currently understood by the mainstream.
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Now that we’ve done the hard work of analyzing the data we can confidently say that only #MMT understands what drives inflation.

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