The Spectre of Inflation In A Modern Monetary Economy

The traditional view held of monetary inflation is that an increase in the money supply results in an increase in the price level. The change of price between two periods of time is the general notion of ‘inflation’, described as a percentage. However, the understanding of inflation rests upon a critical axiom which remains unexamined despite the rapid changes that have occurred in the late twentieth century and the twenty-first century; that inflation has been measured in terms of physical currency which have volume and take up physical space. As of 2018, only (roughly) ten percent of the United States’ wealth is expressed in physical currency. The other ninety percent is digital– numbers on computer screens. At this time, we are afforded the chance to inquire whether or not increases in digital currency impact the price level (i.e. does increasing the mostly digital money supply result in inflation?).

In order to determine the percentage of physical currency in circulation, a ten year review of “Currency in Circulation” and the “Gross Domestic Product” from the Federal Reserve Economic Data of St. Louis (FRED) indicate the estimation of physical currency in circulation in the US.

“Currency in Circulation” is descriptive of “paper currency and coin held both by the public and in the vaults of depository institutions”, while the GDP is “the market value of the goods and services produced by labor and property located in the United States” unadjusted for inflation. Both data sets show a generally stable incline, with the physical currency consistently about ten percent of the total monetary wealth in America, thus concluding that the other ninety percent of wealth is digital.

When we compare the “Consumer Price Index For All Urban Consumers” to the stable inclines expressed in the previous data sets, we see a similar stability of inclination (although it is worth noting it is less stable and fluctuates more often)

The Consumer Price Index for All Urban Consumers is a measure of the “average monthly change in the price for goods and services paid by urban consumers between any two time periods”, i.e. the price level. The CPIs are based on “prices for food, clothing, shelter, and fuels; transportation fares; service fees (e.g., water and sewer service); and sales taxes.”

The major takeaway from this survey is that there is much more research to do to reach any semblance of a conclusion. I would appreciate available data which splits physical and digital currency expressions as to better compare to the price level. However, I cannot deny there is a general inclining trend within the graphs that indicates there is still the spectre of inflation haunting a nearly digital economy. It is worth addressing that I do not believe there is a causal relationship indicated, as there are moments in the CPI which would indicate a reduction in the inflation rate while the monetary growth was stable, and I am uncertain as to the affects the remnant ten percent of physical currency has on the price level in a physical manner. Thus, we leave this noting a correlation between growth in the physical and digital monetary supply with changes in the price level, and a potential starting point for an inquiry into the other factors which may affect inflation, such as the market power of corporations.