G7 consumer price inflation rose to 2.0% in February, according to the OECD, and is likely to have reached 2.3% in March, based on available national data – see first chart. Importantly, "core" inflation (i.e. excluding food and energy) has also picked up recently, from 0.65% in October to 1.0% in February with a further gain indicated for March.

The monetarist rule is that money supply changes lead the real economy by between six months and a year and inflation by about two years. The second chart shows G7 CPI inflation with a smoothed measure of narrow money supply growth (a 23-month centred moving average). The money measure fell steeply from late 2005 reaching a low in September 2007. Inflation spiked in 2007 and 2008 as commodity prices surged but then slumped in the wake of the recession. Headline prices fell in 2009, with the annual decline reaching a maximum in July 2009, 22 months after the trough in money supply growth, i.e. consistent with the monetarist rule.

Monetary expansion recovered strongly from late 2008 in response to central bank easing, with the smoothed measure reaching a peak in October 2009. The monetarist rule, therefore, suggests that inflation will continue to trend higher into autumn 2011.

A subsequent decline, however, may be modest and temporary. The chart includes an extrapolation of the smoothed measure assuming that annual growth in narrow money remains at its February level of 7.2%. The extrapolation subsides to a minor low in November 2010 before resuming an upward trend. The message is that inflation may trend lower between late 2011 and late 2012 but is likely to remain high by recent standards, with renewed upward pressure possible in 2013.