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Is velocity of money really an indicator for when inflation will show up in the economy? Isn’t it possible that inflation can rise while velocity is falling if they print enough M2? GDP and M2 are the two inputs. It looks possible to me that if GDP rises slightly and M2 rises drastically that we will have inflation. In this situation velocity decreases. Thoughts?
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The answer is no, simply because velocity of money isn’t a measurement it is a calculation. M*V=P is the equation which makes V=P/M, so if the money supply is flat or decreasing and prices are increasing then by definition velocity is increasing, and likewise if M is increasing and P is decreasing then V is decreasing. Thinking of V as ‘the number of times a dollar gets spent’ leads people to assume that V is a count of every time a dollar is spent but there is no such count.