In Part 2 of this series, we looked at the reasons why higher inflation is expected. Today, we take a look at the reasons why, in spite of all the necessary ingredients to inflation being in place:
3. Why hasn’t inflation occurred yet?
Although a lot of money has technically been created, much of it isn’t being used. “Velocity”, a common term in an economist’s vocabulary, refers to describe how quickly money changes hands as it is lent time and again throughout the financial system food chain (lent, spent, deposited, lent out again). Inflation is not only a function of the amount of money, but also its use, and a lack of velocity can offset an increase in money supply.
For now, much of the increase in bank reserves is sitting idle on deposit with the Fed, meaning banks are remaining cautious about making new loans. Restoring their balance sheets to health remains a higher priority than new lending.
Meanwhile, additional downward pressure on prices are being caused by growing slack in the economy and continued deleveraging by consumers. Unemployment rates are at 26 year highs and consumers are saving more and spending less. With these factors in place for at least the foreseeable future, there is little upward pressure on prices for consumer goods.
BOTTOMLINE ANSWER: Inflation hasn’t occurred yet due to lack of velocity of money and consumer spending slacking off due to unemployment.
Source: MARE group