October 31, 2020

Reminder on inflation

Comment on Bill Mitchell on ‘Inflation is not necessarily due to excessive spending’*

The most elementary macroeconomic price formula states P=ρEW/R. ρE>1 represents private/public deficit-spending/money-creation and this implies that a period deficit produces a ONE-OFF price hike and NOT inflation.

In order to get inflation going, the wage increases have to be constantly above the productivity increases. In fact, the exact opposite happened.#1 The price formula tells one that in this case, deflation will result.

The crucial point is that the quantity of money is NOT among the price determinants. The price formula implicitly refutes the commonplace Quantity Theory.#2

Egmont Kakarot-Handtke