I loaded up some data from the St. Louis Fed (http://research.stlouisfed.org/fred2/) and thought it would be interesting to see the relationship between the CPI inflation measure and growth in the money supply.
Can anyone explain what is happening? Is there an article discussing this relationship anywhere?
Its a shame the website only has M3 going back to 1960, is there somewhere that published M3 for earlier dates? - preferably going back to before the great depression.
Oil goes up 100% over three years → CPI (ex-energy) is only 2%/year.
Commodities go up 100% over three years → CPI (ex-food) is only 2%/year
Real-estate goes up 100% in three years → CPI (ex-housing) is only 2%/year.
Stocks go up 100% in three years → CPI (ex-stocks) is only 2%/year
The money created out of thin air (M1, M2, M3, money supply) must find its place SOMEWHERE.
The “Law of CPI”: CPI (ex-SOMEWHERE) is always <= 2%/year. That’s why (according to CPI) there’s no inflation while prices magically keep rising all around us.
Think about it. It’s impossible to measure the price of EVERYTHING consistently. Even without the “ex-something” shell game one could still play infinite shell games by “adjusting” the CPI “basket” of relevant goods. And this basket wouldn’t even begin to address the productivity gains (a calculator today has more computing power than a 60’s mainframe computer). CPI is wrong on too many levels, and it’s only used as an instrument for hiding the fact that your cash savings are evaporating in value MUCH faster than you’re told.
Just think logically. If there’s more of ANYTHING (or money, in this case as shown by M1, M2, and M3) what usually happens to its price? Inflation IS money supply and nothing but. CPI is a mere propaganda veil.
Theory of Money and Credit, Chapter 11, The Problem of Measuring the Objective Exchange Value of Money and Variations in it.
Monetary Theory and The Trade Cycle.
An index can never capture fluctuations in the purchasing power of money–it’s literally impossible. The Austrians wrote about this extensively in the early part of the last century, and now the mainstream is figuring it out.
Always take into account the money multiplier. This bad boy has mostly been on a downward trend ever since it has been recorded, and has thus offset some of the consequences of an increasing money supply.
The CPI is changed regularly. For example, they might change Steaks to Hamburger meat because if the price of steaks gets too high people will just buy hamburgers. bla bla bla. But if you compare this year’s hamburger to last year’s steak, you’re not going to show inflation properly
Probably not - the link I provided says M3, M2, CPI-U, and CPI-U* are on 10 year moving averages. Also, the links you provided only date back to 1959. He uses a Fed paper for 1910-1959. Also note that the BLS changed reporting methodologies in 1982. I’m betting you didn’t take all those things into account, no?
Using YoY growth rates can be deceiving, with numerous ups and downs that obscure the larger, general trends. When you smooth the data, there’s a clear correlation, with money supply growth leading price inflation. Without smoothing, it just looks like chaos. Also, it makes sense that prices increase at a lower rate than money supply, due to economic growth.
inb4: gov’t statistics are full of shit generally. Now, why did I post that? Why, to illumine a new generation of libertarians with this timeless truth.
Ok, so it seems that in the long term there is a nice correlation, but in the shorter term the correlation is a mess. Indeed to my eye it looks like a short term inverse correlation. Am I “seeing canals on Mars” or has anyone else noticed? → Look here. I can even think of an explanation: the points where M2 are growing fastest are when stocks/housing/derivatives are rising fastest. At these points investors have the greatest incentive to leave there money in the sky-rocketing investments and not go and spend their money on consumer goods. Alternatively, particularly with housing, when their prices are rising fastest, that’s when people will try their hardest to join the bandwagon and forgo consumer spending in favour of getting a bigger mortgage.
But we’re analysing M2/M3 so we don’t need to “take in to account” the money multiplier. If I was comparing M0 to CPI then the money multiplier may need to be taken in to account.
A low money multiplier is a sign that the money supply has become disconnected from the monetary base. The limits on money creation are now much more related to the general propensity to take out new loans vs. the propensity to pay back/default.
The monetary base is now a tiny insignificant part of the money supply - you can halve it or double it and it makes little difference to M3.
I’m trying to understand better the relationship between the money supply and CPI-inflation. The mainstream textbooks, and many economists say “printing money leads to inflation”… so I thought I’d have a look at the raw data and see how true (or not) this statement is in practice.
The CPI doesn’t measure inflation, so why are you trying to find an imaginary correlation? The raw data will tell you nothing because it doesn’t consider human action. You’re looking at meaningless numbers when you should apply some logic.
