Where many people get it wrong on money supply and price level

I have recently heard some people saying expansionary monetary policy causes inflation. In most cases, that happens. However, it does not happen all the time, and this is the time when it is not happening. Consider the following graph:

The initial money supply is MS1 and money demand is MD2. All of sudden, the unemployment rate rises and income falls. As a result, the money demand falls from MD2 to MD1. Since P=(MV)/Y, the price level will fall as income falls. To restore the full employment output, the quantity of money required is M2. The central bank tries to expand money supply by lowering the nominal interest rate and purchasing bonds. However, it is not willing to lower the interest rate below zero. Then, actually, the quantity of money in the economy is only M3. As much as M2-M3, the economy lacks in the quantity of money. Since the actual quantity of money is smaller than M2, the price level rises only as much as M3-M1. Then, the price level does not change so much or the inflation rate will be very low. Now look at the U.S. inflation rate using the CPI for urban consumers.  

Whenever the Fed QE kicked in, the inflation rate rose and that was it. Then, the inflation rate stopped growing and fell. We really do not see a run-away inflation.