There is widespread agreement that in the long run, inflation is a monetary phenomenon. From a policy perspective, two ideas help establish that money is an important policy variable contributing to inflation. The first is that there is a stable long-run money demand. This quantifies the long-run relationship between money and prices, taking into account the other variables influencing the long-run money-demand relationship without drawing the line of causality between them and the second idea is that money helps to forecast inflation one or two years out, even after some other variables have been taken into account. That money predicts inflation is also consistent with the idea that money growth is influenced by inflation expectations, which explains why money growth leads inflation.
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