US inflation, having jumped by 4.2 per cent, is causing some consternation (as well as a pushback understating of it from the Biden apologists).
But those of us raised on the Fisher identity
MV = PT
(where M is the quantity of money, V is the speed money flows round the economy, P is the level of prices and T is the number of transaction)
are hard pressed to explain why inflation remains so low.
The quantity of money (the Fed’s “M2”) has increased by 33% since January 2020. Milton Friedman’s exposition of monetarist theory would predict a US inflation rate of 30 per cent, given the modest 2 per cent real growth rate
Yes, V and T may not be stable. But few, twenty years ago, would envisage their unpredictability counteracting the increase in money supply that has occurred even with the banks sitting on the money created by the central bank.
On the US experience, Australia’s money supply growth of 10 per cent should pose no inflationary issues.
But who knows whether the dam will break?