A clear relation to the money supply suggests inflation will become an increasingly serious problem for Canada\u0027s economy
The second explanation is favoured by economists who have studied the history of inflations using the monetarist model popularized by 1976 Nobel Prize-winner Milton Friedman, who in a classic study of the monetary history of the United States found that “inflation is always and everywhere a monetary phenomenon.” These economists argue that the Bank of Canada has increased the money supply by an amount that in the light of experience is likely to lead to substantial inflation.
So which is it? A recent paper by John Greenwood, former chief economist at Invesco, one of the world’s largest investment management companies, suggests the monetarist argument has some explanatory power. The nearby graph is from his paper, with Canadian data added.Article content The dots in the graph show that for the sample of the five countries there is a strong, positive relationship between the growth in M2 and inflation. The U.S. has both the highest inflation and the highest M2 creation. Canada has the second-highest values of both, followed by the United Kingdom and at much lower levels, Switzerland, and Japan.Article content
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