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Inflation Myths

Is Money Printing Followed By The Inflation Monster?

The answer is: not always

Data

In these times of economic recovery, after all the disbursements made by governments to try to get out of the lockup and return to normality before covid-19, we can see the consequences, mostly in inflation. On the one hand, last month the US announced that its inflation projections reached 5.4%, the highest in the last 13 years and it is said that it will not be temporary, but will be with them for a while. Europe, meanwhile, expects inflation to remain around 4% for the rest of the year, before falling to 3% in early 2022 and 2% in mid-2022.

In recent years we have seen how Venezuela's hyperinflation reached % in millions. But this terrible effect is due to the fact that the newly created money was used to buy goods and services directly. Whereas, at present, this liquidity stays largely in the financial markets generating an inflation in the price of assets (bonds, stocks, housing...). If this money does not start chasing goods and services on a massive scale, it will not translate into inflation in the shopping basket (CPI). Although this time governments are also doing their part with fiscal policy, a good part of their spending is being converted into household and corporate savings or a way to reduce debts.

UBS economists point out that the Phillips curve and a positive GDP gap explain only a small part of the inflation fluctuations in the U.S. and Europe, about 10-20% of the annual inflation change over the past 20 years. "Energy prices explain a larger part of the inflation movement in these two regions.... However, the simple fact that there has been no other model for forecasting inflation that has proven to be better than the Phillips curve means that it will continue to be the model for analyzing and forecasting inflation in central banks, financial markets and academia."

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2021 Maria Fe Rosales Sandoval

Comments

Umesh Chandra Bhatt from Kharghar, Navi Mumbai, India on August 17, 2021:

Informative article.

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