The news that growth in the much-watched Consumer Price Index continued to fall in June was greeted with virtual shouts of acclamation on Wall Street and elsewhere. At last, it seemed, the cold water the Federal Reserve has been throwing on the economy is quenching inflation’s flames. But while the news is good, it’s no surprise to observers of the money supply. Oddly, few, if any, commentators noted this in their reactions or bothered to remind us that money really matters. Why might that be so?
As shown in the below chart, year-over-year CPI growth peaked at 8.9% in June 2022 and has systematically fallen each month since. It’s now running at a bit more than 3% growth from this time last year. As I’ve pointed out, its rise and fall tends to trail that of M2, a common measure of the nation’s money supply, something, of course, controlled by the Fed.
HOUSE MUST SAVE MILITARY FROM BIDEN’S CLIMATE OBSESSION
In fact, it’s been noted for half a century or longer that money supply growth crudely predicts future inflation, sometimes with a lag of more than 12 months. The reason is simple: When more dollars are produced to chase a limited supply of goods and services, something has to give. Price levels tend to rise. This reductionist model helps us understand the way the world is working; it doesn’t claim to explain all of it.
The pattern is clearly seen in the events of the last few years and suggests we will continue to see slowing CPI growth in the months ahead, but perhaps not by as much as noted recently.
Scanning the M2 growth from 2020 forward shows bundles of dollars placed in taxpayer bank accounts and sent to protect the payrolls of businesses, nonprofit groups, and even churches. M2 surged. Then, when the delivery of helicopter money ended, and the Fed became nervous about embedded inflation and sold large amounts of Fed-owned government securities, M2 growth declined and even became negative. Measures of inflation have followed roughly the same trajectory, only a year or so later.
CLICK HERE TO READ MORE FROM THE WASHINGTON EXAMINER
None of these observations breaks new ground for explaining the relationship between money and inflation. Nor is it a surprise that relatively few elected or appointed political leaders seem interested in emphasizing the role of money in the economy. When citing the causes of inflation, they would rather talk about the war in Ukraine, chip shortages, supply chain problems, wage-push inflation, or corporate greed — almost as though there are inflation gods who occasionally turn on us. No politician worth her salt would want to admit that the decision to ship out helicopter money at a time of distress was the action that fanned inflation’s flames.
As for those commentators and economists who fail to acknowledge the obvious, perhaps some are a little too tied up in political narratives as well. But facts are facts: When it comes to inflation, money matters. And when it comes to politics, money matters a lot.
Bruce Yandle is a contributor to the Washington Examiner’s Beltway Confidential blog. He is a distinguished adjunct fellow with the Mercatus Center at George Mason University and dean emeritus of the Clemson University College of Business & Behavioral Science.
