Inflation is no longer a problem for the United States.. A famous economist reveals the reason!

Veteran American economist Steve Hanke believes that the United States no longer suffers from the problem of inflation.

“I think the inflation story is a historical one,” Johns Hopkins University professor of applied economics told CNBC. “One of the reasons for that is because the money supply is contracting year-on-year by 4% in the United States.”

“We haven’t seen that since 1938. Changes in the money supply cause changes in the price index and inflation,” Hanke added.

The US inflation rate for June came in less than expected at 3% on Wednesday, the smallest year-on-year increase in two years. The core CPI, which excludes volatile food and energy prices, rose 4.8% from a year ago and 0.2% month on month.

The latest data may give the Federal Reserve some room to maneuver when the central bank meets to consider the direction of interest rate policy.

The producer price index in the US is due later on Thursday. And if it also shows lower prices, that could further influence the Fed’s decision to end the rate hike cycle soon.

Traders are betting that there is a 92.4% chance that the Fed will keep rates unchanged at its July meeting, according to CME FedWatch.

“When inflation was oscillating, the PPI went up first and then the CPI went up,” Hanke said. However, the core inflation index has been declining very slowly.

“Now, we’ve turned things around and the PPIs are falling fast like a stone. Even faster the CPI numbers are falling,” but core inflation is lagging behind. “We’ll see it all come down as long as they keep quantitative tightening.”

This comes as central bank policy makers tend to look more at core inflation, which remains well above the Fed’s annual target of 2%.

But Hankey noted that if the Fed continues to tighten, it could get to the “2% range very quickly”.

“Forget all the propaganda we hear — that the Fed chairman has a tough problem, that this is going to be a long fight, inflation is sticky, etc,” he said.

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