Is inflation just around the corner? Part II

The second group of higher inflation advocates focuses on the increase in base money via the lengthening of central banks' balance sheets as well as the huge fiscal deficits. Given that M*V=Y*P always holds (The amount of money times the velocity of money is equal to the amount of output times the price level) and M has been increased by an almost unprecedented amount, P needs to increase drastically as well. Furthermore, as fiscal deficits are ballooning and government's indebtedness will reach levels which cannot be repaid, inflation is the only solution to reduce the debt-to-gdp ratio.
First, is the lengthening of the central banks' balance sheet really such a big problem? I doubt it. For one, I regard more the broad credit aggregates as being important for creating inflation than the narrow central bank money aggregate (that is to say I would not use M0 in the above formula but rather M3, M4 etc.). In fact, the US Fed has increased its balance sheet from around 850bn in mid-2007 to around USD900bn in early September and then in the wake of the Lehman bankruptcy to around USD2200bn by the end of 2008. Since then, the size has been fluctuating around USD2100bn. However, this size pales in comparison to the broad credit aggregates in the US economy which are estimated to be around USD50trn. The lengthening of the Federal Reserve's balance sheet came about by buying assets to stabilise credit markets (with the buying of US Treasuries being only a small part). However, this buying was not enough to a) help restore private credit markets to work properly again and b) lower yields on credit instruments (bar shorter-term securities) to levels below those prevailing at the onset of the financial crisis in 2007. In turn, for most economic agents (bare the government), monetary conditions remain tight (even though the credit crunch has eased over the past months) in terms of yield levels and availability of credit. The deleveraging by corporates and private households has only just started (see the higher households savings ratio) and the broad credit aggregates are unlikely to grow significantly over the next quarters. In turn, the velocity of money ("V" in the above equation) will remain depressed and the inflationary impulse provided by the lengthening in the Fed's balance sheet will not hit the real economy/will not be enough to offset the deflationary forces of the private sector deleveraging. Finally, I think that most of the enacted credit easing can be reversed relatively easily. A lot of the credit easing has been conducted via shorter-dated paper. In turn, even once the economy has moved back on a self-sustainable growth path, the Fed does not need to actively sell most of its holdings. Rather they can stop their buying programs and let existing paper mature.
I am more concerned with the size of the fiscal deficit and the ballooning debt-to-gdp ratios as history has shown that it is very difficult to reverse a structural budget deficit. However, I still fail to see how this can have significant inflationary consequences on its own as long as the state does not default/the currency does not depreciate sharply and/or as long as the central bank can conduct monetary policy independently (and I am convinced this is still the case in the Eurozone and the US).
Here, the USD's reserve currency status will prevent both: a funding crisis and a sharp devaluation. I think that the talk about a sharp USD devaluation is much overdone. For one, I do not see any alternative to the USD for the next years and additionally, the US remains the most important export market for most of the producing world. The situation in the UK remains very different though as no-one really needs to hold GBP.

So overall, I do not believe that inflation is just around the corner due to higher oil prices. Furthermore, I am not worried as well that inflation will skyrocket once the economy recovers given the huge level of excess capacity, the ongoing debt-deflationary process and the ability of central banks to reduce the balance sheet again if need be.