Following the money is fraught with difficulty. Numerous attempts to pin down the precise relationship between the amount of the stuff being printed, or deposited in accounts, and inflation have failed.
So much so that those attempts gave us the term Goodhart’s Law, which describes the annoying tendency for any variable to lose the capacity to tell us what we’d like it to about the economy once we attempt to regulate it.
Money’s wriggliness helps explain why most economists have ignored aggregates in recent decades. However there’s been a revival of late due to the surge in money growth that came after officials the world over flooded their economies with cash in the wake of the pandemic.
That revival is worthwhile. While the link between money and prices is slippery, sharp rises in broad money aggregates — and their corollary — credit, usually do tell us something about both price and financial stability.
Keeping that note of caution in mind, we present to you the charts below, which dropped in our inbox this morning courtesy of Oxford Economics:
Quite a dramatic slowdown in growth, we’re sure you’ll agree.
So how much does this matter for those assessing the inflation outlook?
A slowdown is contingent on central banks ditching their QE programmes as planned. Their money printing has been the biggest contributor to broad money growth in advanced economies. While the withdrawal of this stimulus looks a reasonably safe assumption right now, markets have been overestimating central banks’ appetite to tighten and we have our doubts about whether policymakers’ exit strategies will continue to be as smooth as they have been so far. If this tightening does occur as planned, however, we’d expect a tightening of private sector lending standards too. That would further weigh on broad money growth and inflation too.
For money growth to feed into broader price pressures, much depends on whether we see a rise in the velocity of circulation. As Oxford Economics points out in the note, money could switch hands more often as the Great Reopening gets into full swing (we hope). Yet we’ve been waiting for increases in narrow money (via central banks’ QE programmes and other aggressive monetary easing) to feed through into velocity since 2008. We remain unpersuaded that the factors necessary for a dramatic change — such as a drastic rebalance of power from capital to labour — are really there.
Not quite as simple as less money, fewer problems, then. Indeed, while the aggregates are worth watching, paying greater attention to labour market and supply chain dynamics strikes us as a more fruitful use of inflation watchers’ time.