After 2005 you were looking at inflation rates from 2% to over 5% but after the crash and quantitative easing it has come in at 0% to 3%. One way to explain this is due to the velocity of money as even with the increase in the supply if the velocity is low then the turnover of money within the economy does not increase and can actually decrease. Many subscribe to the quantity theory of money where inflation and deflation occur proportionately to increases and decreases in the money supply but empirical evidence does not demonstrate this. Due to this, some use a more nuanced version adding in the velocity of money in which new money needs to actually circulate in the economy to cause inflation.

Above is the Velocity of money for the M1 money supply which is showing a steady decrease of the velocity after the 2008 crisis of nearly 11 down to 6 which is almost half. M1 is a measure of all of the physical money such as coins, notes, demand deposits and checking accounts which are only a very small proportion of the total money supply.

M2 includes M1 but also includes Near Money which are non-cash assets that are highly liquid such as bank deposits, treasury bills and certificates of deposits.

Summary

Currently, the pumping of quantitative easing from multiple central banks around the world is causing a deflationary spiral. This has led to a boost in bank reserves but it has not picked up lending which was the main aim. Absent the velocity of money, greater QE will not lead to inflation and will lead to capital hoarding. More recently the direct purchase of a greater breadth of assets is keeping the markets levitated but it can lead to a sharp downward spiral when this injection is removed.

The velocity of money is the rate at which money is exchanged from one transaction to the next and how much one unit of currency is used in a set period of time. This rate is considered important for measuring the rate at which money is used in economies for purchasing goods and services. It can help investors gauge how well the economy is performing and it will also be a key indicator for determining the countries inflation.

Now as we have all seen central banks have been using quantitative easing to reflate asset prices which have led to a large increase in the M1 Money supply as shown below.

Just after the 2008 financial crisis, there has been a dramatic increase in the M1 which led many to believe that you would see a pickup in inflation and some even suggested hyperinflation due to the vast quantities created but this is not what we have seen. For example, if there is an increase in the money supply, this should lead to a corresponding increase in prices as there are theoretically more money going after the same pool of goods and services. And the opposite should happen if there is money removed from the system as there is less money now chasing the same goods and services.

But what we have seen recently is a reduction is inflation expectations around the world.

Us Inflation rate

As the M2 constitutes a larger proportion of the overall money supply the changes in the velocity will lead to greater impacts. Unlike M1 which has been increasing since 2000 up to 2008 M2 has actually been decreasing for that time. 

Velocity of money