Uncertainty about the inflation outlook has never been higher, with negative output gaps pointing to the risk of deflation, while the unprecedented fiscal and monetary policy response to the Global Financial Crisis generating concerns that inflation will be reignited. The risk of a significant rise in inflation is reflected in the long term relationship between money supply and inflation. Central banks have been aggressively stimulating money supply - US M2 is up 8% over the last year and Australian M3 is up 14%. While this expansive policy will have to be maintained to lead to a secular lift in inflation, it does highlight that the probability of an upward trend in inflation is the highest it has been in decades.
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