One question that was unanswered in the series of columns on the government’s overdraft at the BoG pertains to inflation. The four columns from April to May of this year did not touch the topic of inflation, even though they were discussing the issue of financing government spending with money instead of debt.
Since the government is able to “create money out of thin air” when it spends from its account at the central bank, why was there no severe inflation? It is an interesting question to ask given that we are taught that “inflation is always and everywhere a monetary phenomenon”. It turns out that inflation is a complicated matter and money creation is not always associated with instantaneous increase in the prices of consumer items such as rent, rice, mini bus fee, phone bill and many others. Inflation is always measured as a percentage change. Specifically, it captures the percentage rate of growth of “all” prices in the economy. The most popular measure of the level of all prices is the consumer price index.