Among central banks and market observers alike, monetarismseems to have gone out of fashion. That seems a touch premature. Take a broader look at the recent inflationexperience in different parts of the world, and the link between money-supply growth and inflation is (still) there.
This will come as no surprise to market veterans. In the 1980s and 1990s, the development of various measures of money supply still attracted a great deal of attention, similar to today's employment and unemployment figures. Since then, monetarism has receded as an economic doctrine; those who nowadays look at the growth of the money supply and emphasize its relevance risk being mocked. This might partly reflect the developments in many parts of the developed world since the financial crisis of 2008. Despite an almost doubling of the money supply within ten years, the United States and the Eurozone continue to have remarkably low inflation rates.
Looked at differently, however, the same data can tell a very different and quite monetarist story, as our "Chart of the Week" shows. We compare the annualized growth of the money supply M2in the period 2007 to 2017 and the consumer price index (CPI) 2017 for several countries. It shows that money-supply growth remains an important determinant of inflation. This is especially so for countries with a particularly strong propensity for fast money multiplication, including emerging economies such as Argentina, Egypt, Ukraine and Turkey. These have seen especially rapid increases in money supply. Unsurprisingly to a monetarist, the results have been double-digit inflation rates.
By contrast, monetary discipline in other emerging markets such as South Africa paid off in the form of moderate inflation. The Eurozoneand the United States may similarly still be reaping the benefits of the previous epic struggle to get inflation down – for all their recent monetary experiments, inflation expectations remain well-anchored.
This leads to the timeless, not at all unfashionable conclusion: In countries with a rapidly growing money supply, price stability is highly endangered. Pushed beyond a certain point, it is lost. Figuring out when this point is reached is tricky – not least because correctly measuring money supply is far from straight forward. To avoid nasty surprises, it might be advisable to always keep an eye on the money supply.
Sources: International Monetary Fund for money supply, Bloomberg Finance L.P. for consumer price inflation data; Deutsche Asset Management Investment GmbH as of 8/23/18