Inflation is the big fear at the moment, right?  Prices are soaring, the money supply is expanding, buy gold quick.

Well. Don’t be too quick.

There is a school of thought to say the real problem is deflation.

First off, remember, rises in the price of oil and food do not necessarily mean an upward inflation spiral.  Long-term inflation only really results if wages rise too, and that normally requires a sharp rise in the money supply.

And the money supply has expanded.  Recently, the growth in the US M3 money supply hit a 37-year high.  Well, actually, there are no official estimates of this measure any more. The US government doesn’t bother, but Capital Economics does, and it is their measure we refer to here.

Besides, the US does still count the M2 measure of the money supply and the three-month-on-three-month annualised rate has more than doubled, from 5 per cent at the start of the year to nearly 12 per cent in April.

So if the money supply is rising, inflation will rise too, as sure as eggs is eggs.

But then, as Capital Economics said, “The source of that acceleration is the swelling flow of money into retail money funds, which is more than offsetting a moderation in the growth of money on deposit.

“These flows into retail money funds reflect portfolio shifts, however, as investors flee riskier assets such as equities that aren’t liquid enough to be counted as money. As such, the pick-up is not necessarily inflationary.”

Then there’s house prices.  They are falling.  If that does not exert a deflationary effect, nothing will.

Finally, you may have heard this one, but right now there is a credit squeeze.  And while some are still in denial, it seems highly unlikely that the banks are going to return to their pre-credit crunch days and lend, lend and lend for a very long time.

There is a growing feeling that once the dust has settled on this particular stage, and especially when oil and food start falling in price, deflation will once again be the watchword.

The picture gets a bit more murky, however, when you take into account the likes of China.  For many of the BRIC countries, inflation is rising, and that has all the hallmarks of something a lot more permanent too.

Ultimately, it may all depend on the exchange rates and whether China et al allow their currencies to float freely.

It may be we could be heading for a period of low inflation in the West, and high inflation in the East.

It will be interesting to see how it all pans out.

© Investment & Business News 2013