US Money Supply and Delayed Inflation?

Readers Question: Perhaps the best definition of inflation is that inflation is an increase in the money supply. If the U.S. increased the money supply by 5% today, your prices at the stores would not take an immediate leap of 5%. It would take a while for you to notice the inflation, but it happened immediately.

There can be a link between the money supply and inflation. See: Money supply and inflation

But, in the real world the link is very tenuous. You could look at graph below and say inflation occurs after a time lag, but when the time lag is up to 10 years, it really is not much use.

It is really hard to find any  meaningful correlation between the money supply (M1) and the inflation rate.

If you look at narrow money supply measures, such as the monetary base then the US has seen a huge increase in the money supply, but no noticeable inflation. But, it is still hard to explain how you can literally create billions of pounds and not cause inflation. Four years ago, ardent monetarists argued that increasing money supply would cause inflation. But, four years later, we’re still waiting.

2 thoughts on “US Money Supply and Delayed Inflation?”

  1. I have always wondered whether there is a way of correlating the broader measure of money supply M3 with global inflation, is it possible that all those extra dollars are going abroad?


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