In the years following World War 1, Germany experienced one of the biggest cases of what is called hyperinflation. While in January 1923 one loaf of bread cost 250 marks, by the end of the year in November 1923 the same loaf of bread cost upwards of 200 million marks. The reasons for this hyperinflation were many and kept layering up on each other sometime before the war ended. A series of events ultimately led to the German government printing money in massive amounts, which drove the value of the mark to the ground. This year both the European Union and the United States started the printer and switched to full throttle as the Corona Virus was roaming the world, in an attempt to save the economy and financial system from a total collapse. This money printing has left many people wondering whether a rise in inflation is on its way as a result. The truth is though, that until now there has been no rise in inflation and it does not seem like there are any signals of it in the future. Let us look at the reasons why this is so.

What is inflation?

Very simply said, inflation is a rise in prices. Inflation can occur because of several reasons such as an increase in production cost, increase in the cost of raw materials, increase in wages or a surge in demand. In post COVID-19 times the surge in demand is the factor that has been worrying many economists and experts. With the total stimulus only from the European Union and the European Central Bank expected to surpass $1.52 trillion and the US Federal Reserve Balance Sheet expanding by more than $3 trillion from mid – march until now there were fears that inflation might surge with this big of an increase in money supply. Such a surge in inflation has not been present though. As we can observe from Exhibit 1 and Exhibit 2 the inflation rate in the US is still at pre – COVID-19 levels while in the Euro Area it is even lower.

Exhibit 1:

Exhibit 2:

Why hasn’t there been a surge in inflation?

There are 2 main reasons why the feared surge in inflation has not been observed and those are 1) a weakened demand and 2) weakened link between money creation and consumer prices. Let us analyze what those mean.

Weakened Demand:

In order to increase inflation, the excess money circulation is supposed to and has to be used on purchasing goods. This would infer that demand rises faster than supply which results in increasing prices and increased inflation. What has happened though, is that we haven’t experienced this surge in demand. This is so because only a small portion of the total worth of the economic stimulus packages by governments actually reach the population. The majority of excess cash created has gone to large corporations. As an example, in the US, citizens receive just $1,200 per citizen. This amount is far from enough to increase demand to such an extent that it creates inflation. In Europe, there were a lot of countries where citizens did not receive such stimulus packages. The result is that the money created did not actually flow into the pockets of people and consequently in the consumer products market, but rather flowed to corporations and consequently to places such as the stock market.

Weakened connection between money creation and consumer prices:

Going back to the crash of 2008 and examining banks’ balance sheets, it can be observed that the majority of the extra money received from the government was either kept as cash and ´´excess reserves´´ or invested in assets such as stocks instead of being lent out to the economy. Something similar is happening now as only a fraction of the new excess money created is flowing and being lent to people and the economy. Another thing to consider in this argument is the fact that a lot of the money created was used to keep businesses afloat, meaning paying wages, rent etc. This is merely covering normal expenses and again does not increase demand.

It is evident that despite Trillions of Dollars have been printed by governments, inflation has not yet occurred due to a decrease in demand and a weekend connection between money creation and consumer prices. Thus, the good news is that you do not have to worry about taking a wheelbarrow with you the next time you want to buy a slice of bread from your local bakery.


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