{"id":3503,"date":"2026-07-02T17:23:30","date_gmt":"2026-07-02T17:23:30","guid":{"rendered":"https:\/\/trusteconomics.eu\/?p=3503"},"modified":"2026-07-02T17:23:30","modified_gmt":"2026-07-02T17:23:30","slug":"inflation-cpi-and-gdp-of-an-economy-do-not-show-the-true-picture-that-prevails-in-society","status":"publish","type":"post","link":"https:\/\/trusteconomics.eu\/index.php\/2026\/07\/02\/inflation-cpi-and-gdp-of-an-economy-do-not-show-the-true-picture-that-prevails-in-society\/","title":{"rendered":"Inflation (CPI) and GDP of an economy do not show the true picture that prevails in society"},"content":{"rendered":"\r\n\r\nInflation and GDP, two key economic indicators, are often presented as objective measures of well-being, but their interpretation is not always as neutral as it seems.\r\n\r\n \r\n\r\nIn the public economic narrative, their use has at times led to distortions that affect the perception of real purchasing power and growth.\r\n\r\n \r\n\r\nMilton Friedman\u2019s critique is gaining renewed weight as their role in economic \u201ctruth\u201d is being reexamined.\r\n\r\n \r\n\r\nBut the biggest problem with the inflation debate isn\u2019t really about the CPI. It\u2019s about the way Milton Friedman\u2019s famous quote is being used as a \u201cweapon\u201d by people who probably haven\u2019t read beyond the quotation marks.\r\n\r\n \r\n\r\nThe phrase you always hear is: \u201cInflation is always and everywhere a monetary phenomenon.\u201d Period. You print money, you get inflation \u2014 or corporations cause it.\r\n\r\n \r\n\r\nAnd then the doomsayers show a graph of M2 and a warning of hyperinflation. But that’s not what Friedman really said.\r\n\r\n
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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

What did Milton Friedman really say?<\/strong><\/p>\r\n \r\n\r\nThe full sentence is: \u201cInflation is always and everywhere a monetary phenomenon, in the sense that it can only be produced by a faster increase in the quantity of money than production.\u201d\r\n\r\n \r\n\r\nThis last clarification changes everything. The doomsayers omit it because it complicates the simple slogan. But \u201crelative to production\u201d is where the real economic substance lies.\r\n\r\n \r\n

Friedman reasoned in terms of the equation of exchange, M*V = P<\/em>*Q<\/strong><\/p>\r\n \r\n\r\n(M): Money\r\n(V): Velocity of Money with\r\n(P): Prices\r\n(Q): Real Output.\r\n\r\n \r\n\r\nThis is an identity, not a theory. The interesting thing comes when you ask which variable \u201cdoes the work.\u201d\r\n\r\n \r\n\r\nFriedman\u2019s claim was that, in the long run, lasting changes in the general price level can only occur when money grows faster than the productive capacity of the economy. The supply side was already in his frame.\r\n\r\n \r\n\r\nA collapse in output with fixed money produces the same effect on prices as an increase in money with fixed output.\r\n\r\n \r\n\r\nSo the intuition that \u201csupply and demand drive inflation\u201d does not compete with Friedman. It is built into his model. The question is whether the imbalance is maintained, which depends on whether monetary policy allows it or absorbs it.\r\n\r\n \r\n

A hard line<\/strong><\/p>\r\n \r\n\r\nFriedman drew a hard line between relative price changes and persistent inflation. This distinction is what is lost in the modern debate.\r\n\r\n \r\n\r\nWhen oil prices spike because of a war, consumers spend more on energy and necessarily less on everything else. Relative prices change. Energy becomes more expensive, discretionary goods are squeezed.\r\n\r\n \r\n\r\nThe general price level does not need to rise unless monetary policy expands the money available for spending on everything.\r\n\r\n \r\n\r\nWithout this adjustment, you get a one-time shift in the level of the price index and then prices stabilize. This is not inflation in the Friedman sense. It is an adjustment of relative prices.\r\n\r\n \r\n\r\nThat is why Friedman could call inflation a \u201cmonetary phenomenon\u201d without ignoring supply shocks. He was simply arguing that supply shocks by themselves do not create persistent inflation. They create volatility around a level.\r\n\r\n \r\n\r\nThe trend of the level comes from the monetary side. Here is the problem with how this is used today. Both \u201cprophets of doom\u201d and television analysts blur this distinction.\r\n\r\n \r\n\r\nDoomsayers see every increase in money and predict persistent inflation, ignoring that the velocity of circulation can collapse and absorb the expansion.\r\n\r\n \r\n\r\nCommentators see every price jump and call it inflation, ignoring that without monetary support it will likely fade.\r\n\r\n \r\n\r\nThe 1970s is the clearest historical example of why both supply and money are needed for persistent inflation.\r\n\r\n

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\"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nMost people remember the decade as an \u201coil shock\u201d story, but that\u2019s only half the story. The CPI was already \u201cburning\u201d before the 1973 Arab oil embargo and again before the 1979 Iranian revolution.\r\n\r\n \r\n\r\nMoney supply growth had been excessive for years, and interest rates had remained excessively low. The oil shocks did not create inflation from scratch. They pushed an already loose \u201ccork\u201d out of an already squeezed bottle.\r\n\r\n \r\n\r\nThe current context is similar, and there is an analogy between then and now.\r\n\r\n \r\n
    \r\n \t
  • A supply shock on loose monetary policy is the combination that produces persistent inflation.<\/li>\r\n \r\n \t
  • A supply shock on a disciplined monetary base produces a one-time shift that fades.<\/li>\r\n<\/ul>\r\n \r\n

    \u201cLet the economy grow\u201d<\/strong><\/p>\r\n \r\n\r\nThis is where the doomsdayist position really begins to break down. The charge is that \u201cprinting money causes inflation.\u201d But in a modern fiat system, every dollar in circulation is debt.\r\n\r\n \r\n\r\nEither it is a bank loan that creates a deposit on the opposite balance sheet, or it is government borrowing financed through the banking system. There is no third option.\r\n\r\n \r\n\r\nThe Bank of England (2014) paper, \u201cMoney Creation in the Modern Economy,\u201d put it bluntly. Banks do not lend out reserves. They create deposits when they make loans, and reserves are created in parallel.\r\n\r\n \r\n\r\nThus, the entire monetary base is, to some extent, debt that must be serviced by increasing nominal income. This has a structural consequence that most \u201camateur monetarists\u201d miss. If money does not grow, the economy cannot grow. Real debts (which are constant in nominal terms) become heavier as nominal income stagnates.\r\n\r\n \r\n

      \r\n \t
    • Bankruptcies are multiplying.<\/li>\r\n \r\n \t
    • Credit is shrinking.<\/li>\r\n \r\n \t
    • You get 1933, exactly what Irving Fisher described in his debt deflation theory. The system is structured to require expansion.<\/li>\r\n<\/ul>\r\n \r\n\r\nSo when someone cries out for M2 to increase, the real question is not whether M2 has increased. It should be increasing. The real question is whether it has increased faster than the productive capacity of the economy. That is the real Friedman test, and it is much stricter than the one the doomists ask.\r\n\r\n
      \r\n
      \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

      The Missing Variable<\/strong><\/p>\r\n \r\n\r\nThe other piece that almost no one discusses is velocity. The equation MV = PQ has four variables, not three.\r\n\r\n \r\n\r\nAnd V, the speed at which money circulates in the economy, is extremely volatile. If you ignore it, inflation forecasts become ridiculous in retrospect.\r\n\r\n \r\n\r\nConsider the purest natural experiment we\u2019ve ever had. From 2008 to 2020, the Federal Reserve expanded its balance sheet through three rounds of quantitative easing.\r\n\r\n \r\n\r\nThe doomsayers were crying hyperinflation all decade long. It never came. Why? Because velocity collapsed.\r\n\r\n \r\n\r\nBanks held onto reserves instead of lending. Consumers deleveraged instead of spending. Money stood still.\r\n\r\n \r\n\r\nThen came 2020. The Fed expanded again, but this time the government sent checks directly to citizens.\r\n\r\n \r\n\r\nSupply chains were disrupted. Workers stayed home. And velocity, instead of falling, rebounded. You had money growth, increased circulation, and capacity constraints all at the same time.\r\n\r\n \r\n\r\nInflation reached 9.1% in June 2022. This is the clearest example of how simply \u201cincreasing M2 = inflation\u201d is inadequate. Inflation occurred when M, V, and constrained Q all moved in the same direction.<\/em>\r\n\r\n

      \r\n
      \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nAnd now, in 2026, the system looks more interesting. The Fed restarted treasury bill purchases earlier this year, as a \u201ctechnical move\u201d for the repo market.\r\n\r\n \r\n\r\nWhatever you call it, bank lending has skyrocketed. Loans are growing at ~10% per year, while business loans are approaching 20%. The money supply is accelerating again. It\u2019s no longer the 2009\u201320 regime where money sat idle on bank balance sheets.\r\n\r\n \r\n\r\nMoney is being put into circulation, velocity is returning to the fore, and the fiscal-monetary arrangement is increasingly looking like \u201ceasing.\u201d This is the framework Friedman would have outlined. Money plus velocity plus a policy environment that increasingly looks like support.\r\n\r\n \r\n

      The Composition of Credit Matters More Than the Quantity<\/strong><\/p>\r\n \r\n\r\nBeyond velocity, there is a second piece that \u201csymbolist\u201d monetarism completely ignores. Where credit is directed matters just as much as how much credit is created.\r\n\r\n \r\n\r\nA dollar borrowed to build a factory expands future productive capacity, but a dollar borrowed to finance a stock buyback inflates current asset prices without expanding the productive capacity of the economy.\r\n\r\n \r\n\r\nA dollar borrowed to a consumer for a vacation increases current consumption without leaving any productive footprint. Same dollar, same \u201cmoney creation,\u201d but very different effect down the line.\r\n\r\n \r\n\r\nThe Austrian School of Economics has a real argument here that monetarists often gloss over. When credit funds are directed to misinvestments instead of productive capital, you can have an apparent \u201cgrowth\u201d that actually just weakens the productive base while inflating asset prices. Much of the post-2008 period worked out just like that.\r\n\r\n \r\n\r\nCredit metrics soared, but the flow was disproportionately directed to financial assets, real estate, and the \u201cengineering\u201d of corporate balance sheets. Consumer prices didn\u2019t move much.\r\n\r\n \r\n\r\nAsset prices skyrocketed. This isn\u2019t inflation in the CPI sense. But it\u2019s not \u201cgrowth\u201d in any meaningful sense either. The current boom in investment in artificial intelligence is the living test of this framework.\r\n\r\n \r\n\r\nThe bank credit that is currently expanding in the financial system appears to be financing data centers, chip factories, energy infrastructure, and related expansion. This is productive credit by definition, as it expands future production capacity.\r\n\r\n \r\n\r\nIf this is the case, the inflationary effect of the recent monetary expansion should be milder than the simple M2 chart suggests, because Q (production) is expanding at the same time as M.\r\n\r\n \r\n\r\nIf, on the other hand, much of this credit is financing speculative valuations rather than actual production capacity, then the Austrian School effect emerges.\r\n\r\n \r\n\r\nAsset prices skyrocket, production capacity does not expand commensurately, and inflation eventually manifests itself either in consumer prices or in a violent reversal in the asset market.\r\n\r\n \r\n\r\nWe won\u2019t know which scenario holds for another year or two. But the framework tells you exactly what to watch for: where credit ends up, not just how much is created.\r\n\r\n

      \r\n
      \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n

      How do different schools of economic thought define inflation?<\/strong><\/p>\r\n \r\n\r\nThe reason these discussions seem to be going on and on is that the basic definition of inflation differs between schools. The table below shows where each tradition starts and what it sees as the cause.\r\n\r\n

      \r\n
      \"\"<\/figure>\r\n<\/div> \r\n\r\n \r\n\r\n \r\n\r\nThis last line brings us back to Bylund. His argument is that the CPI and GDP have ceased to be useful measures because they have become policy targets. Applying Goodhart\u2019s Law in practice. He is not wrong about that.\r\n\r\n \r\n\r\nPrice controls do not \u201cfight\u201d inflation. They suppress the symptom (measured CPI) while exacerbating the disease, namely real shortages and capital misallocation. Nixon\u2019s wage-price controls of 1971 are the classic example.\r\n\r\n \r\n\r\nGovernment spending that does not produce a productive outcome does inflate GDP without increasing wealth. The Soviet Union had impressive GDP growth on paper for decades before it collapsed because \u201cproduction\u201d did not produce anything worth valuing.\r\n\r\n \r\n\r\nSo far so good. But here the criticism reaches a limit. Bylund dismisses the measures without suggesting how politicians, central bankers, investors, or ordinary readers can practically function without them. \u201cJust understand the concept better\u201d is not a workable tool.\r\n\r\n \r\n\r\nThe Fed has to make decisions, money managers have to allocate resources, and investors have to build portfolios. You can\u2019t run a $27 trillion economy with Austrian methodological purity.\r\n\r\n \r\n\r\nYes, the CPI is flawed. All serious economists know that. But the answer is not to abandon measurement. It is to use multiple measures rigorously, understand their limitations, and triangulate: PCE, trimmed-mean CPI, sticky-price CPI, the Cleveland Fed\u2019s median CPI, and money-flow-adjusted M2 measures.\r\n\r\n \r\n\r\nThese exist precisely because serious analysts know that no single measure is enough on its own. The \u201cexperts\u201d that Bylund criticizes for treating the CPI as absolute truth are largely caricatures of television commentators, not the real analytical community.\r\n\r\n \r\n

      What does this mean for investors?<\/strong><\/p>\r\n \r\n\r\nThe bottom line is that both sides of the inflation debate are making symmetrical mistakes.\r\n\r\n \r\n\r\nThe \u201cdoomsday\u201d shills who quote Friedman as \u201cmoney printer go brrr\u201d omitted the second half of his quote, ignored money flow, and missed a decade of deflation that should have informed their model.\r\n\r\n \r\n\r\nThe \u201cCPI is all that matters\u201d school ignored the monetary side and was surprised in 2021 by a wave of inflation that it insisted on calling \u201ctransient.\u201d\r\n\r\n \r\n\r\nThe formula that survives when confronted with the data is this: sustained inflation requires money and money flow that grow faster than productive capacity.\r\n\r\n \r\n\r\nIn a debt-based system, money must grow, so monetary expansion alone doesn\u2019t say much. The real signal is when the growth in money velocity is decoupled from the growth in real output. This is Friedman\u2019s test as he wrote it, and it remains correct.\r\n\r\n \r\n\r\nFor portfolios, this means that you should not:\r\n\r\n \r\n

        \r\n \t
      • React to M2 in isolation; examine M2 together with its flow.<\/li>\r\n \r\n \t
      • React to individual CPI prints; look at the trimmed mean and the \u201csticky\u201d components.<\/li>\r\n \r\n \t
      • Assume that government spending creates growth because it shows up in GDP; examine whether it increases real productive capacity or simply redistributes financial demands.<\/li>\r\n \r\n \t
      • Treat the measures as absolute truths, but neither should you pretend that you can invest without them.<\/li>\r\n<\/ul>\r\n \r\n

        There\u2019s still something important for 2026<\/strong><\/p>\r\n \r\n\r\nThe U.S. Treasury is financing a ballooning deficit with a sharp shift toward short-term interest-bearing debt, with the share of T-bills in total debt exceeding the 20% limit recommended by the Treasury Borrowing Advisory Committee.\r\n\r\n \r\n\r\nWhen the lender of last resort floods the short end of the curve, the central bank is forced to provide liquidity there, whether it wants to or not.\r\n\r\n \r\n\r\nThat\u2019s the definition of fiscal dominance, and it\u2019s the situation where a discretionary central bank becomes a \u201clistener\u201d of fiscal needs.\r\n\r\n \r\n\r\nCombine that with bank credit growth and an AI-driven credit boom, and the critical question for investors is not whether the Fed will tighten policy. It\u2019s whether the fiscal framework will even allow it to do so.\r\n\r\n \r\n\r\nThis is how you take Bylund’s critique of Goodhart seriously without throwing away the analytical tool. And this is how you read Friedman without becoming a caricature of him.\r\n\r\n \r\n\r\n \r\n\r\n","protected":false},"excerpt":{"rendered":"

        Inflation and GDP, two key economic indicators, are often presented as objective measures of well-being, but their interpretation is not always as neutral as it seems. In the public economic narrative, their use has at times led to distortions that affect the perception of real purchasing power and growth. Milton Friedman\u2019s critique is gaining renewed … <\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[19],"tags":[237,57,44,1214],"class_list":["post-3503","post","type-post","status-publish","format-standard","hentry","category-economics","tag-economy","tag-gdp","tag-inflation","tag-milton-friedman"],"aioseo_notices":[],"aioseo_head":"\n\t\t\n\t\n\t\n\t\n\t\n\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t\n\t\t