When the money supply expands, prices tend to rise. They certainly don’t rise uniformly, but as long as the velocity of money is near constant, the average price increase should roughly match the expansion of the money supply.

Recently (except for the recent limit-down day), commodity prices have been on a tear, but the base money supply—controlled for excess reserves—hasn’t moved much. In addition, the core CPI hasn’t moved by nearly as much as the base commodities. This could be explained by shrinking profit margins. However, in the meantime, corporate profits are up.

Let’s say that there was a bad wheat harvest. It is reasonable to expect the price of wheat to rise. It seems reasonable that the price of bread should also rise. Money you spend on bread, however, must come from somewhere else. This causes demand in some other good to drop off. It’s reasonable for falling demand to cause that other good to become cheaper. Without a commensurate increase in pay, it is difficult to have an input cost for a raw material such as wheat lead to a general price increase.

This is not to say it is impossible. If there were only two goods in our economy, guns and butter, they could both rise in price while the money supply stayed the same. In this case, a fall in total demand takes place. Since we measure the quality of life by how much butter and guns we consume, this general price increase without monetary inflation must result in a decrease in the overall standard of living. Again, this decrease need not take place in a uniform manner. Corporate profits can be up, provided enough people take a pay cut or lose their job.