In any case, the idea is quite widespread on social networks: inflation only rose so extraordinarily sharply because the European Central Bank (ECB) printed so incredibly much money.

Most economists believe that this is nonsense.

And the development of the money supply now also plays a subordinate role in the regular analyzes of the central bank itself.

It is all the more interesting that the Deutsche Bundesbank devotes a separate article to the so-called "monetary analysis" in its January monthly report - and there it traces in detail how parallel or contrary the money supply and inflation have been in the past crisis years up to the extreme inflation rates of the most recent ones have developed over time.

Strong increase in the money supply in 2020

Christian Siedenbiedel

Editor in Business.

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There was a first abnormality in the money supply at the beginning of the Corona crisis in 2020. At that time it rose sharply.

The money supply M3 – which, in addition to cash and sight deposits, also includes certain money-like savings deposits, money market paper and money market funds – rose by more than 12 percent in some months over the year.

However, over the course of the two following years, 2021 and 2022, the annual growth rate of the money supply then declined again.

At the same time, the inflation rate rose steadily over the course of these two years.

"This raises the question of a possible connection between the increase in the M3 growth rate and the inflation rate," writes the Bundesbank.

The Bundesbank economists analyzed this using models and came to the conclusion that “money demand shocks” would have made a significant contribution to the rise in money supply growth in 2020.

"These are likely to reflect the increased uncertainty and the build-up of liquidity reserves at the beginning of the Covid 19 pandemic." rather more money that you didn't spend.

Inflation did not rise.

The Bundesbank writes that these liquidity buffers were later reduced.

This was reflected in declining contributions from the money demand shock to money supply growth that eventually turned negative.

Since mid-2020, a particularly expansive monetary policy has apparently increased both money supply growth and, since mid-2021, the inflation rate;

in this phase, however, the rate of growth in the money supply as a whole had already started to decline again.

The unusually strong development in demand after the lockdowns also had a positive effect on money supply growth and inflation.

"Our analyzes indicate that the strong money supply growth in the first phase was mainly caused by money demand shocks in connection with the increased money holdings due to uncertainty, which did not lead to an increase in the inflation rate," writes the Bundesbank.

"In the period that followed, monetary growth and inflation were then positively influenced by macroeconomic demand shocks, which are likely to be due to fiscal support measures in the Covid 19 pandemic, and by an expansive monetary policy." Then there was the Ukraine war and its consequences for the economy.

The Bundesbank believes that the ECB's long adherence to its very loose monetary policy could have contributed to the rise in inflation.

Peculiarities in the case of very high inflation rates

However, the Bundesbank has not only compared how inflation and the money supply have developed over the past few years.

She also took another look at studies on the question of whether there is empirical evidence of a strong long-term relationship between the development of the money supply and inflation.

Studies have shown that when inflation rates are rather low, the development of the money supply does not play such a major role.

However, this can be different if inflation rates are relatively high over a longer period of time, as in some emerging countries.

Therefore, the question would now arise as to whether, with inflation rates of 10 percent in some months compared to the same month last year, one has now switched to a regime in which money supply growth, unlike for a long time, plays a role again.

In any case, looking back historically, the Bundesbank thinks it can distinguish between three phases in which the central bankers in the euro area conducted “monetary analysis”.

At the start of monetary union there was a "two-pillar strategy" consisting of monetary and economic analysis.

The “monetary pillar” initially focused on money supply growth and its deviation from a reference value, but this was soon abandoned for good reasons.

With the financial crisis, there was a particular focus on financial shocks and financial stability.

Since its most recent strategy review, the ECB has been talking about a combined "financial and monetary analysis" that is also intended to include the financial markets and the financial situation of banks, companies and private households.

In any case, the Bundesbank still sees many interesting issues here.