What happens to the future prices and inflation as a result of the expansionary polices in response to the pandemic?
As a result of the increases in the money supply and government spending in response to the pandemic, future prices of goods, services, and assets will increase for sure...not necessarily the inflation rate.
Under a system of inflation targeting, bygones are treated as bygones. It means that the increase in prices is not a concern, but the rate of growth of prices, i.e., inflation, is kept constant.
As a result of the increases in the money supply and government spending in response to the pandemic, future prices of goods, services, and assets will increase for sure...not necessarily the inflation rate.
Under a system of inflation targeting, bygones are treated as bygones. It means that the increase in prices is not a concern, but the rate of growth of prices, i.e., inflation, is kept constant.
The plot shows that currency per unit of real output and the CPI are positively correlated, thus in the short run the increase in the money supply increases prices under inflation targeting (it increases real output sooner, in the short run).
The second plot shows that there is no correlation between the growth rate of money per unit of real output and the expected inflation rate in the long run (6 quarter moving average) under inflation targeting.
The second plot shows that there is no correlation between the growth rate of money per unit of real output and the expected inflation rate in the long run (6 quarter moving average) under inflation targeting.
These are New Zealand data, but it is true in all inflation targeting countries.
That said, the pandemic might be an adverse supply shock. It knocks output production and increases the price.
That said, the pandemic might be an adverse supply shock. It knocks output production and increases the price.
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