Restricting the money supply will help contain inflation.
In the classic crime drama film Scarface, Elvira’s character gives Tony Montana a useful piece of advice: “don’t get high on your own supply.” The maxim has roots in the narcotics trade, but it can apply to the addiction that an economy can develop to its own money supply.
Since the 2008 global financial crisis, the European Central Bank (ECB) has allowed the money supply to increase twice as fast as the growth rate of economic output. Initially, the expansion failed to boost inflation, casting doubt on the monetarist conventional wisdom that inflation is always and everywhere a monetary phenomenon. But during the COVID recovery, excess liquidity set the stage for today’s elevated eurozone inflation.
In recent research, the Bank for International Settlements found a statistically significant relation between money growth and inflation in the eurozone. Easing monetary conditions preceded the rise in prices across the bloc, and economies with stronger money supply growth witnessed noticeably higher inflation.
The money supply is one of the main metrics being monitored by the ECB to check the impact of recent policy tightening. Trends in this data have raised hopes for continued disinflation.