Sustained inflation is always and everywhere caused by money growing faster than output.
The strong form is disputed after decades in which the money-inflation link loosened badly. Supply shocks and expectations are the main rival explanations, and the 2021-23 episode was argued on all three grounds.
In practice
- A central bank facing rising prices must decide whether it is looking at money growth, a shipping bottleneck or wage expectations, and the three call for different responses.
- A government that prints money to cover its deficit for four years gets inflation whatever its shipping costs did.
- Possible explanations
- The explanation is quantity theory: if money grows faster than output over long periods, prices adjust, since the extra money must be held at a lower value.
- In its favour
- The long-run relationship holds across countries and across high-inflation episodes, and it disciplined the loose accounts of inflation that preceded it.
- Against it
- The short-run link loosened badly after financial deregulation, money aggregates became poor guides for central banks, and the strongest rival accounts, supply shocks and expectations, explained episodes such as 2021 to 2023 better.
- Standing
- The strong form is disputed after decades in which the money-inflation link loosened; supply shocks and expectations are the main rival explanations.
- Subject
- Economics & Incentives
- Essay
- The regularities money obeys