Why inflation might not jump

Date posted: July 21, 2014

There appears to be heightened concerns about inflation today, according to host Mary Walden. Some point to the tremendous quantity of new money the Federal Reserve has engineered as the source of their fears, but others say, ‘not so fast.’ There may be a lingering break on inflation. She asks her husband, NC State economist Mike Walden, “What is this break?”

Mike Walden: “Well, the Federal Reserve has created a lot of money over the last five years. The issue though is that you need an accelerator for that money to really impact inflation. That accelerator in economics we call ‘velocity.’ It’s simply the rate at which money turns over, changes hands. And our velocity number is at a 20-year low by one measure, and it’s at a 50-year low by another measure. The point is all that money the Federal Reserve has created is really not moving. A lot of it is simply sitting in the vaults of the banks. And as long as that continues, we’re unlikely to have a big inflationary problem, even though the Federal Reserve has created all this money. So we need to not only look at how much money the Federal Reserve has created, we need to look at how fast that money is getting out of the door. That money is not getting out of the door. If that continues, I think we’re still going to have low inflation.”

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