A previous and oft-heard question asked why no inflation results from the Fed pumping money into the economy.

Are we simply seeing a methodical wage suppression, thus no official "inflation," while prices soar in certain sectors dominated by "shareholders," non-wage income, and the "one-percent" or whomever?

The money moves first into the financial industry, where actual production investment is less attractive. It seems that as long as no money gets locked into "sticky" labor contracts, the Fed can pump away and the results are not deemed "inflation." The money does not cycle up in wages or wage-earner goods.

In other areas, however, we do see soaring prices: art, luxury goods, high-end urban real estate, philanthropic gestures, political campaign funding, ivy educations, high-tech medicine, hedge fund fees, dividend payouts, tax-avoidance cash hoards, stock bubbles, etc.

Can the absence of official "inflation" be explained in large part by the "disaggregation" of labor, middle-class debt, and a new class configuration since the late 1970s? More like a "redistribution" or even a "customizing" of inflation.

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    $\begingroup$ (+1) I like this question, it's fresh. $\endgroup$ Nov 13, 2015 at 22:58

4 Answers 4


Quantitative easing without high inflation can be explained by low velocity of money.

Think about a property tycoon who sees times are hard and instead of investing all his money in a development project, he buys gold which he keeps in a vault. The property project would have provided employment, and the wages would be used by workers to buy other things in the economy (high velocity). The gold in his vault just sits there (low velocity).

Economic troubles result in low confidence and low velocity of money. Central banks pumping money into the economy somewhat offsets this. As long as the overall velocity of money matches the productive capacity of the economy, there won't be high inflation. One concern of course is that central banks cannot control the velocity of money, so if all this new money gets velocity we could get high inflation that central banks cannot control.

Now think about where you mentioned soaring prices. Many of these are places where rich people can store wealth at low velocity: real estate, fine art, gold, etc. So yes, the effects very much are connected.

  • $\begingroup$ But the fed are pumping money while also providing a high enough interest rate to satisfy the safety seekers, so every attempt of easing is met with an equal counter in the form of excess reserve it seems, which then slows down veloity further. $\endgroup$
    – Revoltic
    Nov 18, 2015 at 13:11

Assume a money demand function of the form

$$M^d_t = P_tY_te^{-\theta i_t}$$

where $P_t$ is the price level, $Y_t$ is output, $i_t$ is the nominal interest rate.

Equilibirum in the money market imposes

$$M^d_t = P_tY_te^{-\theta i_t} = M^s_t $$

Forward once, take logs and then differences, to obtain

$$\ln P_{t+1} - \ln P_{t} + \ln Y_{t+1} - \ln Y_{t} = \ln M^s_{t+1} - \ln M^s_{t} +\theta(i_{t+1}-i_t)$$

The difference of logs approximates the growth rate. So the left-hand side is inflation, $\pi_{t+1}$ plus the output growth rate, $g_{t+1}$ and denote $m_{t+1}$ the growth rate of the money supply. Then we get

$$ \pi_{t+1} + g_{t+1} = m_{t+1}+\theta(i_{t+1}-i_{t})$$

The growth rate of the M2 measure for Money in the USA for the period (end-of) 2013-2014 was around $5\%$ (World Bank data). Meanwhile, inflation in the same period fell from $1.5\%$ to $0\%$. GDP growth rate was at $2.2\%$

Then, according to the above relation, we must have had

$$\theta(i_{2014}-i_{2013}) = -2.8\% = -0.028$$

which, given also that the estimates for $\theta$ are below unity, did not happen (it would require a drop in nominal interest rates more than $3$ percentage points, while they were virtually unchanged).

So the equation appears too crude... or, it does open the way to break the money supply into two components, one of which does not affect the price level in an economy.

This won't be a mechanical decomposition: it will require economic arguments in order to single out which of the channels of money supply increase are to be considered "neutral" with respect to the goods price level, and then measure them separately and test empirically this break-up.

For example, the M2 measure that I used above is defined as (World Bank website quote)

Average annual growth rate in money and quasi money. Money and quasi money comprise the sum of currency outside banks, demand deposits other than those of the central government, and the time, savings, and foreign currency deposits of resident sectors other than the central government. This definition is frequently called M2; it corresponds to lines 34 and 35 in the International Monetary Fund's (IMF) International Financial Statistics (IFS). The change in the money supply is measured as the difference in end-of-year totals relative to the level of M2 in the preceding year.

By looking separately at the growth rates of demand, time and savings deposits for example, one could start having ideas.


I think this question cannot be answered with Yes or No. Below I take a look at some issues with inflation and changing class structure.

1. Inflation is very difficult to measure accurately

All inflation measures we have (CPI, PPI, measures excluding gas, food, etc) are estimates of inflation. Maybe one day we will be able to log every purchase of every citizen made within a year, but even then it will not be totally accurate. Say I bought xPhone 4 last year for 500 dollars but this year I bought xPhone 6 for 550 dollars. Given that those are different models and xPhone 6 is twice as fast, can we say that inflation was 10%? When it comes to art and luxury items it is even harder to determine inflation there because every item is essentially unique. Indices of inflation are also problematic to update because if we add a bunch of new items to it every year, this index will be useless as time-series.

2. Money supply measures do not measure all of the money

Federal Reserve keeps track of several money aggregates (M0, M1, M2, etc.), but even the broadest measure (MZM) only tracks money circulated on the markets. Since 'Greenspan's Era' market deregulations, over-the-counter (derivatives) markets have grown significantly. There are a lot of money instruments traded on those markets. By BIS accounts close to a quadrillion US dollars (http://www.bis.org/statistics/derstats.htm). Understandably, much of those derivatives are on balance sheets of the US banks, hedge funds, and other large institutional investors. When these derivatives stop performing, like they did in 2008, they can take huge banks, like Lehman Brothers, down with them in days, unless banks can find funds to compensate for toxic derivatives. In other words, banks use up real cash to pay for every cent of non-performing derivative. This is like an endless pit that needs to be filled with money. Ironically, the profits from derivative trading go to banks and hedge funds.

3. Structural changes on labor markets increase inequality

Other than retiring baby-boomers, the US (and the world) is experiencing a shift into high-tech knowledge-based economy where uneducated and low-skilled people are not as needed as before. Unemployment rate for high school graduates is twice as high as for college graduates in the US (http://www.bls.gov/news.release/empsit.t04.htm). In Southern Europe its about 3-4 times as high. The education system cannot instantly adjust to a huge spike in demand. Everyone wants a degree and those who do not have enough money to squeeze into a "bottleneck" and get into a university, end up unemployed or underpaid. These structural changes undoubtedly slow down inflation, but their effect is hard to assess given the lack of good statistical data.


I can't answer if the class structure reconfiguration could be the explanation... Also it is unclear what do you mean with absence of inflation? The inflation obviously is seldom 0 (and therefore not absent). Do you mean a low inflation, less than certain percentage?

However, back to the point, there's a possible explanation closer to the method of gathering statistics: inflation is calculated on a basket of goods

When it comes to Consumer Price Index, a “Basket of Goods” is a collection of hundreds of commonly purchased goods that represent the average American’s spending habits.

None of the areas you point out to have soaring prices are typically included into this basket and, thus, do not reflect onto official inflation figure.

  • 2
    $\begingroup$ The whole point of the question is that there seems to be inflation (sustained higher prices) on things that aren't accounted for in the CPI. There has also definitely been inflation close to zero, if not deflation in European countries, so I'd be hard pressed to agree that inflation, at least recently, is seldom zero. $\endgroup$
    – Kitsune Cavalry
    Nov 17, 2015 at 16:38

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