Money and inflation: the history lesson Centuries of economic data teach us that periods of persistently rising prices are also periods in which money no longer acts as an “anchor” to limit inflationary pressures.

In recent decades, it’s a lesson that has increasingly been ignored. It’s almost as if we’ve forgotten that inflation is, ultimately, a monetary phenomenon.

COVID-19: A monetary misdiagnosis Economically, the COVID-19 crisis was regarded by many primarily as a demand challenge. Central banks responded by offering very low interest rates and continued quantitative easing, even as governments offered huge fiscal stimulus.

Monetary growth went through the roof and the value of financial assets surged.

Excessive monetary stimulus when supply is constrained In truth, COVID-19 had only limited lockdown-related demand-side effects in the advanced economies. Supply-side effects have proved to be both large and far more persistent: markets now work less well, countries are economically disconnected, and workers are less able to cross borders and, in some cases, less readily available within borders. Loosening policy conditions when supply performance has deteriorated so much is only likely to lead to inflation.