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It seems like only yesterday that the inflation debate was all about “Team Permanent” vs. “Team Transitory.” But after several months of low inflation data, a kind of consensus has arisen: Inflation has revealed itself to be transitory.
This is only a temporary (or should I say transitory?) consensus. There are signs that some economies, including that of the US, may experience a phenomenon known as “reheating”: a rapid turnaround that causes inflationary pressures to re-emerge. Is such a phenomenon possible?
Consider a simple scenario involving output and money, much of which takes the form of credit expansion by banks and other intermediaries. In a well-functioning economy, money and output grow at roughly the same rate.
When economies experience turnarounds, however, conditions on the ground can change rapidly. In such circumstances, the growth of the money supply might outpace the growth in…
