Did the supply side help lower inflation?

The money supply (M2) went up about 40% from Jan. 2020 to June 2022. This can cause a large increase in demand, which raises prices.

We also had supply side problems during Covid with so many business being shut down and people not working. But over time those problems have subsided. So supply has started to shift back out, which lowers prices (or at least keep them from rising as much).

The graph below shows the price increase with the increase in demand only.

So that illustrates what happened first with the increase in the money supply. The next graph shows that prices don't rise as much once we bring in the supply increase.

Two recent Wall Street Journal articles covered this. See  Fed Extends Pause on Rate Hikes but Keeps Door Open to Moving Higher. by Nick Timiraos of The WSJ. Excerpt:

"That inflation eased as growth strengthened this summer highlights how the economy has likely benefited from improving supply conditions, including fewer bottlenecks and shortages of goods, freight shipping and workers. 

Powell said those supply-side improvements could allow inflation to continue to fall even if economic growth is solid, suggesting that stronger growth isn’t necessarily a problem for the Fed. “We feel like we’re on a path to make more progress, and it’s essential that we do,” he said."

Also see Fed Takes Heart in a Supply-Side Boom by Greg Ip of The WSJ. Excerpts:

"When spending and employment grow as quickly as they have lately, it normally means inflation pressure is building and the Federal Reserve might have to raise interest rates.

But on Wednesday Fed Chair Jerome Powell suggested otherwise. Demand, he said, has indeed grown rapidly, but so has supply. A supply-side boom generates the best of all worlds: brisk growth and falling inflation."

"Supply normally evolves slowly with demographics, investment and innovation, but it fluctuated sharply during the pandemic and its aftermath. A shift toward spending on goods from services because of lockdowns and then stimulus checks pressured supply chains, leading to goods shortages. Millions of people left the labor force, changed occupations or moved, resulting in widespread job vacancies.

As a result, inflation leapt in 2021, even though by conventional metrics the economy had plenty of spare capacity. Unemployment, for example, was above the 4% Fed officials consider sustainable over the long run.  

In recent quarters, Powell suggested, that dynamic has gone into reverse as supply chains have normalized and the labor force has expanded. In September 2021, unemployment was at 4.8% and there were 10.9 million job vacancies. Two years later unemployment was lower, at 3.8%, normally a sign of a tighter job market, but vacancies had fallen, to 9.6 million. That is largely because in the past year the labor force grew by about three million people, about four times the normal long-run rate, according to what the Congressional Budget Office estimated before the pandemic."