A surprising global macro development, post the Global Financial Crisis (GFC) of 2008, is the conspicuous absence of inflation in the developed world. Traditional economic theory that links inflation to money supply has largely become irrelevant. The massive injection of liquidity via Quantitative Easing (QE), post the GFC of 2008, did not create inflation.
The simultaneous liquidity injection by the leading central banks of the world, following the COVID-19 shock, has been unprecedented. Yet, inflation in developed markets is below target. Many economists believe that inflation has been killed, permanently. But it is too early to celebrate the 'death of inflation'.
Why increased money supply has not triggered inflation?
Briefly, there are three factors. One, China, in recent times, has emerged as the factory of the world, mass producing and exporting goods cheaply. Two, modern e-commerce giants procure goods from the cheapest destinations of the world and sell them at very low margins with efficient modern supply chains. Third, ageing population in the developed world has impacted aggregate demand. Powerful combination of these three factors has prevented inflation from rising, in spite of the humungous liquidity infusion.