To understand inflation, several factors must be taken into account: how money enters the economy, starting with the central bank and the lending activities of commercial banks in response to credit demand by the government, businesses, and households. Another factor is the rate of change in the circulation of the money supply. This so-called
velocity of circulation depends on the actions of economic agents. Transactions increase or decrease depending on how quickly people, firms, and government agencies spend their money. The more money moves from hand to hand, the higher the so-called money velocity. Therefore, the velocity of circulation must not be regarded as a purely statistical concept by dividing the nominal national income by the respective monetary aggregate. Velocity is a concept of human action.
An increase in money prices means a reduced
purchasing power. Because human action takes place from moment to moment, from decision point to decision point,
expectations change with the circumstances.
If an individual expects rising prices for the goods he plans to purchase, he will increase the speed of his spending, and when falling prices are expected, his transaction frequency will tend to fall. This creates a self-reinforcing loop:
existing price inflation tends to accelerate because people want to turn their money into goods as quickly as possible. In contrast, price deflation will deepen when people prefer to wait on spending because they expect that prices will fall further.
If prices continue to rise, the transaction speed increases, and the inflation feeds itself. Similarly, the expectation of price decreases encourages hoarding.
...
A new chapter opened toward the end of 2021. The free fall of the velocity ratio has stopped. At the same time, price inflation took off and accelerated in early 2022. A reversal of the velocity trend imminent. Even more extreme price rises will follow when inflationary expectations take hold. In this case, the velocity of circulation will shoot up, and the Fed will be able to do nothing to stop it.
Source:
https://mises.org/wire/fed-gets-it-wrong-money-velocity-too
04-May-22