In 2001, the output of widgets increases 20%. The Money supply increases 20%. Therefore, the average price of a widget stays at £0.50 (zero inflation) In 2002, the output of widgets increases 16.6% and money supply also increases 16.6%. Prices stay the same and the inflation rate is 0% However, in 2003, the output of widgets increases 14% but the money supply increases 42%. WIth the money supply increasing faster than output, there is a rise in nominal demand. In response to this rise in demand, firms put up prices and we get inflation.