“Inflation is always and everywhere a monetary phenomenon”
– Nobel Laureate Milton Friedman in speech given in India in 1963
We have discussed before many times that money supply growth drives the direction of inflation. When money supply growth is soaring (M2 in chart below), inflation soon follows. Too much currency chasing the same amount or fewer goods. Inflation 101.
M2 money supply growth grew at 2-5% annually for the past 70 years and then COVID arrived. During the first 24 months of COVID, M2 money supply grew by +45%, record setting money printing. We flooded the system with about $3 trillion too many and inflation (CPI) reacted accordingly. The bad news is that inflation is still elevated. The good news is that money supply growth is now cratering, and inflation will soon follow. The direction of both money supply growth and CPI inflation is headed lower-er.
It’s hard to see an aggressive Fed policy calling for higher rates with a backdrop of a big drop in money supply, a sharply declining pace of CPI inflation, ongoing regional/small banks crisis, and the US economy likely in a recession by Labor Day 2023. I think the Fed is likely done on rate hikes.
FTM = follow the money.
Source: EISI as of May 23, 2023
Chief Investment Officer
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