Are there any parallels between current U.S. inflation and what happened to Germany in the 1920s?

It seems that when Germany could not make some reparation payments for World War I, the allies tried to seize German mines and factories. The German government told workers to stop working (which reduced supply in the economy) but they also printed money to keep paying those workers (which increases demand or at least prevents it from falling).

Something that cost one Mark in August 1922 ended up costing 10,200,000,000 Marks 15 months later in November 1923. This amounts to a monthly inflation rate of 322 percent. See my post In 1923, Germany printed money to pay workers who were told to stay at home.

Now we merely had 7.0% inflation in 2021 and 6.5% in 2022. But something similar happened. Businesses were shut down and people were told not to work because of Covid. That reduced supply. Then the government started giving people money. That increases demand. M2 (which is one measure of the money supply) was up 19% in 2020 and 16% in 2021.

For more details on what happened recently in the U.S., see Why Inflation Erupted: Two Top Economists Have the Answer: Former Fed chair, IMF chief economist say it wasn’t pandemic or stimulus; it was the pandemic, then the stimulus by Greg Ip of The WSJ. Excerpts: 

"For two years debate has raged over what caused the highest inflation since the 1980s: government stimulus or pandemic-related disruptions.

Now two of the country’s top economists have an answer: It’s both. Pandemic-related supply shocks explain why inflation shot up in 2021. An economy overheated by fiscal stimulus and low interest rates explain why it has stayed high ever since."

"The study, released Tuesday, is by Ben Bernanke, former chair of the Federal Reserve, and Olivier Blanchard, former chief economist of the International Monetary Fund."

"When Congress passed President Biden’s $1.9 trillion American Rescue Plan in early 2021, which included checks to households, enhanced jobless benefits and aid to state and local governments, inflation was around 2% and unemployment, though coming down, still above 6%. 

At the time many forecasters thought the stimulus could push demand above the economy’s potential to supply goods and services and unemployment below its long-run natural rate of around 4%. Yet few thought this would meaningfully raise inflation. In previous decades unemployment had remained similarly low without raising price pressures.

A few disagreed, notably former Treasury Secretary Lawrence Summers and Blanchard. Both warned the stimulus was so large it would push the economy dangerously into overheating territory.

Inflation did shoot up, hitting 7% that December, 5.5% excluding food and energy."

"Bernanke and Blanchard build a relatively conventional model in which inflation is a function of, among other things, the gap between the supply and demand for labor, the public’s expectations of inflation, and commodity prices."

"Bernanke and Blanchard use the ratio of job vacancies to unemployed workers (to labor market tightness)."

"If stimulus had overheated the economy, it should have shown up in the labor market, i.e., an unusually high ratio of vacancies to unemployed. In fact, labor market conditions put downward pressure on inflation through the third quarter of 2021, the authors concluded. Instead, the inflation that year was driven almost entirely by shortages and energy prices. (To be sure, many shortages reflected restricted supply interacting with demand boosted by stimulus.)

Demand shifted abruptly from services to goods in the early months of the pandemic. The overall effect should have been a wash as prices rose for goods and fell for services. It wasn’t, because goods producers faced supply constraints, which caused costs and prices to spike, while costs to service producers didn’t decline much."

"These pandemic disruptions did eventually subside. Why didn’t inflation then fall? The reason, the authors conclude, is that by this point demand was so strong, reflecting the legacy of low interest rates and fiscal largess, the labor market was significantly overheated with the ratio of vacancies to unemployed up dramatically. Moreover, the initial surge of inflation had an echo: It lifted workers’ expectations of short-term inflation, which then partly found its way into their wages.

If anything, the study might understate the effect of pandemic disruptions. The labor market didn’t just overheat because of excess demand, but reduced supply, as well."

"This decline in supply-side potential hasn’t gotten much attention in the inflation debate, but its role could be significant. John Williams, president of the Federal Reserve Bank of New York, last week estimated that potential was 4.2% lower at the end of 2022 than its prepandemic trend."

"In 2020 the Fed introduced a new framework and guidance under which interest rates would stay near zero until maximum employment was restored, even if inflation topped its 2% target. That “contributed to delayed action and the inflation overshoot,” former Fed Vice Chair Donald Kohn and Brown University economist Gauti B. Eggertsson say in another paper to be presented Tuesday."