The hypothesis is that a lot of this new money got funneled into asset price markets, rather than being spent on goods and services. Measured rates of price inflation for consumer goods have remained stubbornly below 2%.
This view is misguided. First, dollars are not “trapped” in one sector of an economy, unable to be spent in other areas. If for instance equity prices are very high relative to food, people will sell equities and buy more food, or otherwise adjust and bring the prices back to proper levels. The experience of hyperinflation in Weimar Germany and Venezuela shows that it is not possible to keep price increases “bottled up” in particular sectors. They spread through the entire economy very quickly.
…recent price-earnings ratios are only modestly above their historic values. That may be a reason to be cautious, but it is hardly a sign of suppressed inflation. Bond prices are high, but real interest rates have been falling for centuries. And the European Central Bank tends to pursue tighter monetary policy than does the Fed. Europe often has very low interest rates, including sometimes negative nominal rates.
To see why the huge increase in bank reserves did not result in inflation, consider that there has been a considerable decrease in U.S. excess bank reserves over the last five years. No one claims that this has been accompanied by a massive deflation, whether in securities markets or elsewhere. Once that point is conceded, it’s possible to see why higher levels of reserves are not necessarily inflationary.