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The Return of Inflation?

Though they have received most of the attention, supply bottlenecks are hardly the only factor to consider when assessing the recent surge of inflation. Far more important are broader structural changes in the economy and the alarmingly complacent attitude of central banks.

FRANKFURT – After many years of low inflation, prices have risen almost everywhere in recent months. Energy and commodities have been leading the way, owing mainly to post-lockdown supply bottlenecks. But while such obstacles are widely seen as temporary, implying that the inflationary spike will disappear soon, other factors are at work as well, implying that it won’t.

Chief among these longer-term factors is the rapid growth of money. Most monetary aggregates (not just central-bank money) have risen at a breathtaking pace, though this development seems not to worry central banks and many economists. With money having disappeared from the leading models used to explain inflation, the Nobel laureate economist Milton Friedman’s famous dictum that “inflation is always and everywhere a monetary phenomenon” is rarely quoted anymore.

The “Quantity Theory” claims that inflation’s causality runs from money to prices. Yes, empirical evidence seems to have largely undermined Friedman’s hypothesis with respect to moderate inflation. But the fact remains that nominal wages and the prices of goods and services cannot keep on rising without a corresponding expansion of money. And strong monetary growth over time can also increase risks in the development of asset prices and financial stability.

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