Is it possible to have inflation without increase in the supply of money?
For example, if workers demanded higher wages, and goods went up in price, but the money supply in circulation did not increase. Or is this an impossible paradox?
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$\begingroup$ If you had a real, permanent demand shock that increased the price of the good, then that would be considered inflation. Money supply is just one of the more obvious ways of creating it. I don't think you're off kilter here. $\endgroup$– Kitsune Cavalry ♦Commented Dec 13, 2015 at 5:07
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3 Answers
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It all depends on what you mean by inflation and by money supply. Technical questions and answers need specific definitions, otherwise everyone ends up talking at cross-purposes.
Is it possible to have an increase in general price levels without any changes to the amount of money in circulation? Yes: if the velocity of circulation of money increases, and the amount of goods and services available to buy does not increase by as much.
Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation? Yes: if the amount of goods and services available to buy, decreases, so that there's more money chasing fewer goods.
Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation, and with no decrease in the amount of goods and services available to buy? Yes, if the demand curve changes so that the same amount of money is now used to buy a smaller quantity of stuff at higher prices.
Is it possible to have an increase in general price levels without any changes to the amount of money in circulation or the velocity of circulation, and with no change in the amount of goods and services bought? No, because the velocity of circulation is by definition total transaction value divided by the amount of money in circulation, so if velocity, quantity and money supply are constant, then prices must be too, because total transaction value equals prices times quantity.
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$\begingroup$ I would add something about the expectations channel. If it happens to be the case that expectations are unanchored by sustained high inflation (perhaps initially triggered by money growth) then it is entirely feasible to have something akin to hysteresis where the forward looking component of inflation dominates. Such an idea requires an insidious prime mover...but inflation, perhaps, might be a self-sustaining phenomenon. At least for a bit. $\endgroup$– 123Commented Jul 27, 2018 at 14:35
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Conceptually it helped me in the past to tackle this Question by a simple classification (I was overly confused by all those inflation related terms that swirl around (galopping-, mild-, stagflation etc.).
By now it is almost consensus amongst all economic theories, that in the long-run inflation always has a monetary cause (i.e. through an expansion of the monetary base).
In the short run we can disentangle two cases where the CPI rises:
Cost-push inflation: Through an exogenous increase of an important consumer good (e.g. an oil-price shock that makes driving by car a lot more expensive)
Demand-pull inflation: When the demand for a product that is important for the CPI exceeds supply. In the medium-run this will of course smooth out, since new suppliers/producers will pop up because of the potentially high profits.
From a theoretical point of view, this was basically a combination of keynesian and monetarist insights.
answered Dec 14, 2015 at 17:31
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$\begingroup$ It's not true that inflation always has a monetary cause. Inflation (accelerated inflation) is created by "too much money chasing too few goods". You can get inflation if the output of the economy goes down. That's is the case of Zimbabwe for instance (for a longer explanation see: bilbo.economicoutlook.net/blog/?p=3773 ) $\endgroup$– RobertCommented Mar 9, 2017 at 16:35
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$\begingroup$ "in the long-run"... of course in the sort-run there can be different effects at play $\endgroup$ Commented Mar 15, 2017 at 12:51
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$\begingroup$ @Robert so you are saying that it is about a balance of the two, hence if the "economy" shrinks then one should also "lift" out money from the money supply? $\endgroup$ Commented Jul 23, 2018 at 17:57
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I believe that inflation is only caused by an increase in the money supply due to a dilution of the currency. All other causes mentioned above tend to be simple short-term market fluctuations that will eventually "smooth out". We are told that 2% or 3% inflation is a good thing but 3% inflation is basically a 3% tax on all outstanding currency including petro dollars, eurodollars, drug money, dollars in mattresses, and you name it. The more inflation, the less the government is required to pay when reimbursing T-bills. The beauty of gold and crypto currency is that they can only be diluted slightly, thus any increase in value is not really an increase in value but a decrease in the value of the dollar.
