Myth-Busting: Money Printing Must Create Inflation, By Nicolas Rabener

Some investors are betting on inflation to follow the spike in the money supply in 2020. While this is possible, the money supply has been increasing for more than a decade but inflation has fallen consistently over the same time period.

The UK data highlights a strong positive correlation between the BOE’s balance sheet, money supply, and inflation between 1947 and 1995. But thereafter, the relationships broke down. Money supply and inflation still moved in tandem, but the central bank activity seemed largely irrelevant

Further Thoughts

Similar analysis on the eurozone reflects the same trend: Central bank money printing is largely irrelevant to money supply and inflation.

Given their typical mandate to create moderate inflation, the all-powerful central banks seem quite powerless. Or they are simply fighting forces they cannot overcome: namely, the negative demographics and negative productivity growth that contribute to low economic growth.

Should investors worry about the mass money printing by central banks? Certainly. It has distorted financial markets and inflated prices across asset classes. But perhaps this simply leads to lower future returns rather than higher inflation.

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 Myth-Busting: Money Printing Must Create Inflation, By Nicolas Rabener