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Wang Guangyu: Four Characteristics of Future Inflation in the United States

Browse:247Times | latest update:2022-07-13

Global economy affected by COVID-19 pandemic is gradually recovering. Obviously, current inflation in the United States is not caused by growth of demand side and may be caused by excessive currency issue.

The relation between money supply and inflation has always been a hot financial topic. On June 15, Federal Reserve announced a 75-base-point increase in interest rate, which set a new record of highest interest rate increase since 1994. It is believed by the market that this is a "stable door locking" for preventing high inflation, because post-pandemic inflation  in the United States rose significantly, The United States is bidding farewell to globalization and low inflation and entering a "post-modern period". In a specific loose period for fighting against COVID-19 pandemic, sufficient money supply, low interest rate and low inflation coexisted. But the pattern has been broken, which further raised doubts about achievement of objectives of growth, stabilization of price, employment and other policies.

Interaction between Money Supply and Inflation

Price stability is an important measure of healthy operation of economy in a country. Central banks of the countries are trying to control price level through monetary policy so to promote economic growth. It is generally believed that inflation can be defined as sustainable growth of prices of goods and services in an economy within a certain period of time. For example, there is always moderate inflation in the context of economic prosperity in the United States. In the 1930s when economic recession occurred in the Great Depression, money supply in the United States increased by USD 28 billion, with average growth rate of 7.7%. However, gold increase was only USD 1.66 billion from 1921 to 1929, indicating that inflation was not caused by gold. In the 1960s, traditional theory of quantity of money was criticized, and Keynes said that increase in quantity of money would result in semi-inflation at most so long as there were unused resources in the economy. In the 1970s, after the collapse of Bretton Woods System, excessive money supply intensified inflation and led to economic stagnation. In 1974-1975, the inflation rate was still over 11% and the unemployment rate hit the highest point in the United States. In this period, the direct relationship between money supply increase and price rise was generally accepted.