Don’t ignore the money supply in the fight against inflation

2023-09-26 20:22:19

The money supply in the euro area increased rapidly after the outbreak of the pandemic. A little later, inflation also shot up. Some saw this development as a causal connection and confirmation of their concerns that the European Central Bank (ECB) had fueled inflation through its expansionary monetary policy. For others it was an illusory correlation: it was not the money supply, but supply bottlenecks and energy prices that drove up inflation.

The cause of inflation is not only important in retrospect. The consequences of climate change, the pandemic and the war in Europe can continue to threaten price stability in the future. It is therefore important for central banks to learn the right lessons from the strongest surge in inflation since the 1970s.