Education Information

This is, obviously, a huge amount of money. It is, for instance, nearly five times the entire budget of the NHS for 2021-22, or almost five twenty times the budget for the Defence Forces for the same year. But what matters for inflation is what happens to the money. For the supporters of free markets and Monetarists, the idea that creating more money automatically leads to inflation is very old one. Milton Friedman, one of the architects of the turn to free market capitalism in the 1970s and 1980s and leading Monetarist, argued in the 1960s that “inflation is always and everywhere a monetary phenomenon”. He meant that if inflation was happening, it could always be explained by changes in the amount of money in the economy. When free market supporters today claim that QE leads to inflation, they are trying to make the same point. Their argument is that, if more money is put into the economy, unless there also a growth in the number of things to buy, this new money will automatically lead to price rises. There will be more money chasing the same number of goods and services and so (the theory goes) people supplying the goods and services will have an incentive to put up their prices to obtain some of that extra money now circulating in the economy. But the argument does not stand up as far as general inflation is concerned. There is no obvious link between QE, which has been used since April 2009, and general inflation, as the graph below shows. Since QE started in early 2009, inflation has repeatedly fallen to very low levels, even turning negative in May 2016. For significant periods of time, prices were falling, despite the new QE money in the economy.

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