‘s Next for Inflation // John Hinderaker
Inflation has ravaged Americans’ standard-of-living. It is the worst we have seen in decades. Although there has been much happy talk from the administration about how prices are expected to fall, no one believes that they will. What is the future?
John Phelan , my colleague, offers an answer. Prices should remain stable for a while unless the federal government launches a new money printing spree.
[O]ur current inflationary issues are caused by the Federal Reserve printing trillions in a short time. This was to buy financial assets from the government and private sectors when COVID-19 hit.
This is illustrated in Figure 2. It shows a sharp increase in the rate at which the Monetary Base is growing.
The technical discussion follows. The chart illustrates graphically the remarkable expansion of the money supply by the Fed in 2020 and 2021.
John then documented the relationship between money supply expansion and CPI:
M2 is the money supply, which is more closely linked to inflation as measured by changes of the CPI. Inflation is when the money supply increases relative to the available goods and services to spend it on.
This process can take some time. How long? In February 2021, the peak annual rate for M2 growth was 26.9%. Sixteen months later, the peak annual rate for CPI growth was 9.0%. We can see another close match if we push the data for M2 expansion forward sixteen months, as shown in Figure 2. CPI measures inflation as a result of an increase in the money supply as measured by M2.
This is a simple but brilliant idea. The fit is almost perfect if there is a 16-month delay.
The conclusion is that the current period of inflation is ending.
These relationships give us a good base to speculate about where inflation might be heading. The answer is “down”, and perhaps quite sharply. The rate of M2 expansion is back to its pre-pandemic levels. If this drives CPI inflation, as the data suggest it, then inflation should return to pre-COVID-19 levels in the next 16 months.
Let’s pray that the Fed and the new Congress do not screw it up.
