Why are people so confused about the relationship between money and prices. It really is quite simple; if a central bank prints lots money today, then 12-18 months down the line the economy will experience a rapid increase in prices.
The US Federal Reserve has been printing lots of money lately. Even allowing for all the dubious adjustments to their key measure of price stability - the CPI - those newly minted dollars will eventually show up in the data.
Well, today the CPI gave inflators at the Fed a slap in the face. US inflation is now at its highest level since 1991. It hit 5.3 percent. The monthly rate went up 0.8 percent; while the annualized inflation rate for the last three months is running at over 10 percent. Yes, we are one year into the credit crunch, which was supposed to reduce lending activity and bring inflation down, and during the last three months, the US is running a double digit inflation rate. So much for deflation.
If anyone thinks that things are suddenly going to turn around, just take a look at US policy rates. Currently, the Federal Funds rate is negative. We are not talking marginally negative; the Federal Funds rate is now about 350 basis points into negative territory.
Negative interest rates will pretty much guarantee rapidly rising prices. It will also distort savings and investment decisions, and if a Central bank persists with the policy long enough, growth will begin to slow. Negative interest rates are the defining feature of stagflation; zero growth, rising unemployment, declining living standards, contracting credit and accelerating prices.
This is exactly where the US is right now, and where the UK is about to go.