How can inflation be 3 % but the growth in the money supply have increased by 13.8% ?

Question

The two figures don't tally ! Is inflation really nearer to 14% than 3% ?

These are UK figures - sorry I should have been clearer - the Money Supply data coming from the Times newspaper.

Answer 1

First of all, where are you getting your data? Between end of May 2006 and end of May 2007, the M2 incerased from $6,766.9 billion to $7,215.8 billion:

http://www.federalreserve.gov/releases/h6/hist/h6hist1.htm

which, if I am doing the math correctly, is a 6.63% increase...

However, 6.63% still does not equal 3%, so the mistery remains... :) Let's try to demistify...

Recall the Hume-Fisher equation of exchange:

MV = PQ

where
M is money supply,
V is money velocity,
P is price level, and
Q is real GDP

Now let's rewrite the equation:

P = MV / Q

and differentiate it (approximately, of course):

dP = dM + dV - dQ

It is very easy to see that change in price level dP (aka inflation) is determined not only by change in money supply dM, but also by change in money velocity dV and change in real GDP dQ. More specifically to the present-day U.S., inflation is about 3%, growth in real GDP is a little over 2%, change in money supply is just under 7%, so money velocity must have decreased by about 2% (probably as a result of the slowdown in the housing market)...

Answer 2

Growth in money supply is influenced by other factors than just inflation.

Aggregate money demand:
Md = P * L(i,Y)

Where P is the price level and L is aggregate real money demand. P accounts for inflation. If price levels rise then people need more money to buy the same goods.

L, aggregate real money demand, is determined by i (interest rates) and Y (output or GDP). If interest rates rise, money demand falls because people would rather invest it in vehicles like stocks and bonds that lack liquidity but pay back interest, than keeping cash in their wallet or putting it in their checking account - where they would be able to access it quickly, but it is literally losing value by the day due to inflation. The opposite is also true; if interest rates fall, money demand will increase.

Assuming interest rates are relatively constant that just leaves Y, another way of saying GDP. Because real GDP has risen, the quantity of goods and services bought in transactions has also increased. You need more money to buy these additional goods and services at a given price level.

So the answer to your question is that money supply has increased by much more than inflation because the economy has grown at the same time. If the economy were stagnant and remained the exact same size (and interest rates were unchanged), then the change in money supply would indeed be exactly equal to the rate of inflation.

Answer 3

Money amount is not based on inflation. The value of money is based on inflation. Unfortunately since the gold and silver was taken out of the money we use, the government can print all the money it wants because it has virtually no real value. The only value it has is the value we choose to put on it. So much for Greenspan and all of those who preceded him back to the 1960s.

Answer 4

Very simply, they are not directly related

Money supply increases also depending on how much money the banks lend out. I didnt check, but likely this number has dropped again, allowing banks to increase the amount of loans they give, creating new money.

In addition, if there is a positive trade deficit, central banks tend to increase money creation to meet the needs of their citizens.

Inflation is caused by different reasons, and i am sure u can find out how by searching

Answer 5

If output increases, more money supply doesn't lead to inflation. That simple xD

Answer 6

This is because governments believe their own propaganda.
If the truth of the failure of their fiscal policies becomes to obvious they change the way in which statistics are collected and interpreted, thereby making their failure into a success. .

I think it was Disraeli who said, " there are lies damned lies and statistics."

The Times figures proberbly come from the government Office of Statistics or some such body

Answer 7

Inflation is only how much the price of goods is increasing. The money supply can be above or below that, as it does not generally affect the price of goods.

Answer 8

The rich get richer.
The 3% is how much things have gone up. Idealy you earn 3% more and spend 3% more.
The 14% is how much more richer the rich are.
Simple really

Answer 9

Because "inflation" is BS!