Will “slack” offset inflationary pressure of money supply?
This article appeared in the WSJ over the weekend. It examines the impact that “slack” in the economy is having on curbing the inflationary pressures of money supply.
A couple weeks ago I posted this piece in which I wrote about Irving Fisher’s equation of exchange. When you solve for price level (a change in which is the definition of inflation) you arrive at P=MV/Q where M= money supply, V=velocity of money, and Q= GDP.
In effect the WSJ article is arguing that although M has increased over the past year with government stimulus efforts V has slowed drastically and is expected to remain low for some time. In essence, V represents “slack” in the economy.
At some point the economy will begin to rebound and the Fed will need to figure out how to unwind the money supply or else we may see double digit inflation which would likely lead to double digit mortgage rates.