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The reports of the monetarism death are greatly exaggerated

Jean-Pierre Dumas

June 15, 2023

In my opinion, it is impossible to talk about inflation without mentioning dates, the beginning of inflation and the cause of inflation. Inflation is always and everywhere a monetary phenomenon (Friedman). It seems to be out of fashion. If central bankers and professors of economics had looked at the evolution of the money supply (M3-Divisia index) in the US, they would have seen a 21% increase in M3 over one year in May 2021.

Why they did not see anything?

Why did they (central bankers and others) not see it coming? At that time (May 2021), inflation as measured by the increase in the CPI was 0.2%... they said, as usual, that the link between money and inflation had disappeared.

Remember J Powell at Jackson Hole, in August 2021, inflation was transitory.

"Households, businesses, and market participants also believe that the current high inflation readings are likely to prove transitory and that, in any case, the Fed will keep inflation close to our 2 percent objective over time."

J. Powell, August Jackson Hole, 2021

Inflation had "pretty much come about from nowhere".

Christine Lagarde, October 2022, Irish TV interview

A little bit short for a central banker...

They just forgot that there is a lag between money growth and inflation, the lag, in the US for this inflation, was one year. After about 12 months of money growth (M3-Divisia) of 21% on an annual basis, inflation surged to 4% (twice the target) in May 2021. It reached a peak in June 2022 (8.9%),

Figure 1 Look at M3 rate of growth in the US, the elephant in the room

Source : Fred &

If we follow our argument, since the US money supply has been negative since January 2023, thanks to the Fed's policy (end of QE plus central bank rate hike), the Fed seems right not to raise its interest rate

Have the prices of primary commodities had an impact on inflation?

Commodity prices started to rise well before the war in Ukraine. At the beginning of 2021, commodity prices increased by 14.8% (annual basis). They peaked at 84% in April 2021. It is difficult not to have inflation in this situation.

Figure 2 Commodity prices started to rise well before the Ukrainian war

Source: IMF commodity prices

March 2023, M3 (Divisia) variation is negative (-2.6%), commodity prices -32%. In this environment, we think, the Fed is right to announce a pause on its rate hikes.

Figure 3 Altogether

What we have learned:

  • Money matters, if the Fed had included the money supply in its complex model, it would have had an inflation signal as early as April 2020, it did not pay attention because at that time inflation was 0.3%. It forgot Friedman's lesson that money affects inflation with a lag.

  • Explaining inflation by expectations seems to be a circular explanation, you explain inflation... by inflation. At the beginning of 2021, the only thing central bankers knew was past inflation, and past inflation for more than 10 years (2009 to March 2021) was below 2% per year. Whatever complex econometric model you use, if it is based on expectations, expectations after years of inflation below 2% will give an inflation expectation of... 2%. In addition, if the central bank's target is 2%, it is hard to imagine a different outcome.

  • World commodity price increase was 84%, April 2021

  • With negative changes in commodity prices and M3 since the beginning of 2023, it seems reasonable that the Fed does not raise the Fed rate.

  • It is impossible not to see excessive QE as the source of money growth and hence inflation.

  • QE cannot fine-tune inflation

  • The role of the excessive budget deficit (2020-2021) financed by QE has spilled over into open inflation (Cochrane).

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