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

Following the Commerce Department’s release on the morning of April 10 showing that March consumer prices rose at 3.3% year over year in March, this writer received well over a dozen emails from Wall Street analysts, market strategists and economists making the same main point: It’s the jump in oil prices triggered by Iran’s closure of the Strait of Hormuz that’s primarily responsible for the “hot” CPI reading. They posit that as long as the cost of gas at the pump and the sundry petroleum and petrochemical derivative products—from plastics to fertilizers—remain elevated, the trajectory will remain far above the Fed’s target tempo of 2%. These experts also invariably forecast a sharp downtrend in the inflation curve once the conflict ends.

But a maverick economist asserts that these prestigious commentators are missing the problem’s true cause, and that while prices are jumping at the same time oil’s spiking, it only appears that the petroleum squeeze is to blame. He’s Steve Hanke, the veteran “hardcore monetarist” who is a professor of applied economics at Johns Hopkins University and has been nicknamed the “Money Doctor.” “Everyone’s been writing about how oil prices are causing inflation. It only looks that way. The two are correlated, but the first doesn’t cause the second at all,” declares Hanke.” He points out that although Wall Street regarded the new 3.3% figure as a surprise and as a result of the war, Hanke wasn’t surprised. He notes that the three month annualized rate that occurred back in February was also exactly 3.3%. “Inflation was accelerating before the war, and it will keep accelerating after the war’s over and oil prices fall,” the big time contrarian told Fortune. “It’s at the point now where the genie is clearly out of the bottle and won’t be put back in any time soon.”

Hanke contends that it’s growth in the money supply, not price shocks like the one we’re now witnessing, that determine the overall course of the price level. “If gasoline and other oil products get more expensive, people have less to spend on rent, restaurants and everything else,” he says. “Supply chain disruptions only change relative prices, they have no impact on overall inflation.” It’s the explosion in the money supply he asserts, that’s the real villain. That’s just what the monetarist view predicts. “It’s commercial banks that create 80% of new money,” says Hanke. “The Fed only creates the other 20%. It’s the big surge in that banking credit that’s pushing up prices.” He adds that a rise in the money supply translates into higher prices only following a significant lag. The monetary takeoff happened over two years ago, and he’s been warning of its aftermath ever since.

He points out that the Fed was en route to slaying inflation in 2023, when commercial credit created by banks was negative. But that metric reversed course the following year, entering positive territory in March of 2024, then racing to hit a pace of 6.6% in February. “That’s an enormous increase, and the current rate’s higher than the golden mean for achieving 2% inflation,” says Hanke. Once again, it’s bank lending that accounts for the lion’s share of the leap in the money supply. “The banks opened up lending in response to the Administration’s signal that it would loosen regulations and reserve requirements, among other things,” he adds.

Japan in the 1970s is a great example of how loose money policy, not the oil crisis, sparked inflation

Hanke argues the giant price surge in this country during the 1970s also arose from monetary excess, not the worst oil crunch in modern history. For example, he points out that prior to the 2nd chapter of the crisis in 1979 and 1980, the money supply was waxing at a torrid 11.2% in period before the crisis, twice the level consistent with a 2% CPI, spawning 13.2% inflation. Had growth been moderate, he argues, the moonshot in prices wouldn’t have happened.

As proof, Hanke cites Japan’s experience during the same period half a century ago. In 1974, the first oil cataclysm ignited by the Yom Kippur war got almost universally tagged for driving inflation from 4.9% to 23.2%. But Hanke contends that the seeds were actually planted in mid-1971, when the Bank of Japan gunned the money supply at 25.2%. Here’s the evidence he’s right. In July of 1974, the BoJ reversed course, chopping the pace of money expansion in half. By 1978, inflation had dropped to 4.2%. That year, the revolution in Iran sent oil prices skywards again. But the BoJ’s moderation—contrary to the scenario in the U.S.—kept prices in check; inflation defied the shock by actually declining to 3.7%. “The oil crisis occurred and inflation went below where it was before the shock because of all the tightening,” says Hanke.

Hanke calls the Japan example “a natural experiment, and they’re hard to find in economics.” He laments that the U.S. didn’t heed that lesson, nor the fall out from our own excesses in the last oil squeeze. It’s allowing money supply to run hot that will saddle Americans with inflation no matter what happens in the Gulf. The oil crisis will end with the war, it’s the inflation predicament that has legs.

This story was originally featured on Fortune.com