A first model

Money

Illustrative path · annual rates

The reward for holding a currency

Rates people see, and the buying power left after inflation.

Money supply growth Inflation Interest rate Real interest
An illustrative annual path showing money supply growth, inflation, interest rate, and real interest.
Real interest 1.50%Year 1Interest 3.50% − inflation 2.00%

The model

Real interestinterest − expected inflation
Money supplygrowth → inflation pressure
Currency valuedemand ÷ supply

Money growth is not the definition of inflation. Inflation is a rise in prices. More money can be one cause.

Read the path

Illustrative annual rates, in percent
YearSupplyInflationInterestReal