Commentary
The nightmare for the central bank is not high inflation by itself but when high inflation is not responsive to tightening measures. As an example, we can look at the situation in the UK. The accompanying chart shows that the UK has broad money (M4) growing year-over-year (YoY) at zero percent, down from the recent peak of over 10 percent three years ago. Since broad money reflects not only the money in circulation but also its turnover rate, a sharp drop in growth should indicate that money flow (lending) is indeed cooling down.
(Courtesy of Law Ka-chung)
How should this phenomenon, that lending is cooling while inflation is still heating, be interpreted? Notice that for the graph, we have already used core inflation, which excludes food and energy, so the volatile components and potentially the supply side shocks should be much reduced. The gap between broad money growth and inflation (price growth) is determined by real transactions (or roughly, real GDP) growth and money velocity growth. GDP growth should not be the reason, as it has recently slowed significantly to 0.2 percent….