Is Inflation a Monetary Phenomenon?

• Author: Yardeni, Ed
• Position: OFF THE NEWS

"How much longer must inflation remain subdued for central bankers to consider the possibility that inflation may not be a monetary phenomenon, or at least not solely a monetary phenomenon? Their central conceit is that they can control the economy thanks to the quantity theory of money MV = PY... This assumes that they can determine the money supply (M) and that the velocity of money (V) is constant or at least predictable. If so, then they can drive nominal GDP (PY) and raise the price level (P) once real GDP (Y) is equal to or exceeds its noninflationary potential. By the way, they also need to have a constant or predictable money multiplier (m), i.e., the ratio of the broad money supply (M) to high-powered money (H), which is mostly bank reserves under their control. Neither the money multiplier nor the velocity have been constant or even predictable, for a very long time, and even less so since the financial crisis of 2008.

"Since late 2008, high-powered money has soared thanks to various quantitative easing (QE) programs, yet the growth rates in broad measures of the money supply have remained subdued as the money multiplier has plunged. While the central bankers can take some credit for reviving economic...