How can M4 money supply be rising at 13.7% (to August) and inflation be at 2 or 3 % in Britain?

Question

How can the inflation rate be at such a low rate if the growth of the money supply is expanding at such a high rate. The increases in GDP don't really accord with this either.

How do you square this circle?

Answer 1

M4 or Broad Money is the money in private bank accounts plus coins and notes in circulation.

Taking inflation to be the consumer price index which measures a selection of goods purchased by a typical consumer. This is usually what gets touted as the inflation rate.

Inflation is therefore set by the price of a common basket of goods. These goods may not accurately reflect the prices of goods and may not include every item purchased. For example no one had a mobile phone in the 50's so the basket of goods did not include it then but probably does now at some point the transition was made. However until it is made the price of mobile phones were not included and existed outside the index. In the same way illegal items such as cocaine are not included in the system. Further the system is inaccurate as the black market, grey market and the Internet allow for hugh variations in prices.

More money can also appear in the country when the super rich move in to London or goods are sold or services are sold abroad.

So M4 whilst baring a relation to inflation does not necessarily run along side it and it would depend how you measure inflation.

Finally no account of debt is taken by M4 if the amount of debt held by the individual increases then the amount of physical money in the system can increase without effecting inflation directly.