The CPI to m3 is not close at all, and who knows what it looks like for MZM. Furthermore, your charts cover a 50 year period, where there are major fluctuations (nevermind the fact that it stops at 2006). Either way, you misunderstand my position: the prices of the goods chosen for the CPI do not tell you anything about overall relative price distortions, or the misdirections of capital and labor. When there is a correlation it is an arbitrary one (correlation does not mean causation).
In the long term it looks pretty good to me: http://www.nowandfutures.com/key_stats.html#money_cpi
Arbitrary? What do you mean by that?
I know that very well. But I think you are overstating your case if you claim the apparent long term (10yr m.a.) correlation is just coincidence.
The chart you provide in the OP looks entirely different.
The price of commodities rose by 100% in 2008 and the CPI was at 3%. The curve for housing prices was practically vertical and the CPI remained considerabaly low throughout the 90s and the last decade.
Global supply rose 270 kb/d in December to 86.2 mb/d, on both higher OPEC and non-OPEC output.
Forecast global oil demand remains virtually unchanged at 84.9 mb/d in 2009 (-1.5% or -1.3 mb/d year-on-year) and 86.3 mb/d in 2010 (+1.7% or +1.4 mb/d versus the previous year)
Jan. 21 (Bloomberg) – China’s growthaccelerated to the fastest pace since 2007 in the fourth quarter, capping Premier Wen Jiabao’s success in shielding the nation from the global recession…true???
http://www.bloomberg.com/apps/news?pid=20601087&sid=asqZE.UsivdE
i am not sure about the commodity price increases you speak of.
if the above info is true it seems that supply increased and demand stayed flat…occurences a 100+ year old global industry by this point should be able to cope with via competition rather easily…without massive price increases.
with various products and processes that are developed that offer different levels of increased productivity i dont think you can make any real correlation between cpi and money supply increase.
certain credit-trails can possibly be traced to malinvestments, but i am not certain of the specific level of harmful price-inflation that would cause…if any. if a few items went up but most went down and an overall budget is less for many once adjusted for inflation then the various cpi modes may have some validity regardless of monetary-inflation.
I don’t know what you’re talking about, and neither do you.
Gold, silver, copper, tin, corn, wheat, oranges, oil. You know?
Indeed true. My chart is the raw data, the other chart (posted by meambobbo) is the 10 year moving average of M3 growth vs. the 10 year moving average of CPI growth
It looks like in the short term the correlation is very poor (or even negative!), but in the long term the correlation is very good.
I’d expect short term correlation to be negative actually. When CPI is rising fast, CB is tightening. When CPI is falling or is stable, CB is inflating.
I thought i’d contribute since I’m working on an econometric analysis of inflation, or was… my hard drive is a few hundred miles away… long story short, I can’t show you any data because I don’t have it with me, but here’s my 2 cents:
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Are you actually regressing anything, or just plotting graphs? You’re not going to get very far that way.
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CPI should be used as an index in absolute terms, not as a percentage change or anything like that. Moreover, if you model CPI linearly you’ll probably misspecify the model. CPI grows exponentially, so that means you’re probably better off modeling it as a logarithm. For that matter, the same applies to the money supply (Hayek’s accelerationism, right?). We’ve only just started being taught formal tests for functional form misspecification so I haven’t done any of those yet though, so don’t take my word for it.
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I believe I used M2, which seemed to yield the highest coefficient of determination between the money supply and CPI (having also tried M3 and MZM).
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I think my model was a multiple regression one. My other explanatory variables were levels of credit (can’t remember which series exactly) and I think something else.
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I haven’t played around with dummy variables a lot yet, but the disturbance term grows in fluctuations over time, starting around the 80’s I believe. Moreover there is a cyclical pattern in the error term, which means I’ve under-fitted my model (I’m not including some important variable).
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I was thinking that just looking at money supply was pointless, since a lot of that money is sitting abroad doing nothing. This is especially true now that China has been hoarding dollars, and of course eastern europe, especially Russia and Belarus, use a lot of dollars locally, so this has to be taken into account somehow.
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We haven’t been taught how to use lag time yet, but I figure that has got to be important, if it does what I think it does (I have no idea). But basically, we would expect there to be a lag between money supply creation and price inflation, so that can probably be modeled too, and might strengthen the relationship.
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If I remember correctly, my coefficient of determination was above 0.8 in the first single variable regression model I tried, which is pretty high, although we’re dealing with time series so it’s not amazing.
When my housemate brings my computer back, I’ll post some graphs, but I’ve got lots more work to do on it…
Regards,
Fred
Could you please elaborate on what changes the BLS introduced in 1982? I think the early 80’s was when the residuals in my model started fluctuating more wildly.
Excuse my ignorance, but what does CB stand for?
Probably central bank.
As a small side-note that I don’t believe has been mentioned here:
Mises.org calculates its own money supply figures…
That’s excellent! I’ll be able to use those now, instead of relying on Fed data, thanks 
The brain is a brilliant pattern matcher, and can spot at a glance all sorts of things that statistical procedures struggle with. Don’t get me wrong, I’m not against doing statistics at all, but its important to use your eyes in addition to doing the stats. For example if the short term fluctuations are inversely correlated and the long term changes are correlated (perfectly possible) that would probably be missed altogether if you never sat and had a good look at the graphs in the first place. You’d probably just do some kind of “correlated or not” test and leap to an oversimplified conclusion.
I agree that if comparing absolute CPI vs. M3 then you should use logs. I think you can learn things from both comparing logs of absolute values as well as looking at rates of change (no logs required). There are all sorts of things you can see easily with one type of comparison that are very hard to spot in the other.
Good point. If you manage to get together some data for M3 kept within the US I’d be very interested to see it.
I look forward to seeing them.
I agree, you have a point there. The problem however is that mainstream economists won’t recognize any sort of proof based on “look at how this correlates”. They like to see formal statistical tests. But yes, I ought to pay more attention to plots too, you’re right that I would have otherwise missed such a correlation.
Printing money (growing M1, M2, M3) doesn’t merely LEAD to inflation. It IS inflation, by definition. Defining inflation as (an easily manipulated and constantly “updated”) CPI is only done for the purpose of throwing dust up in the air and in everyone’s eyes.
Z.
When they say “printing money leads to inflation”, I think perhaps they mean:
A: Increasing the monetary base or lowering interest rates leads to an increase in the money supply
B: An increase in the money supply leads to an increase in the “cost of living”
Unfortunately I think that both A and B are very tenuous and crude links in the short term, though in the longer term it becomes more true.
I think we need more than one word for “inflation”, perhaps we could use the labels “M0-inflation”, “m3-Inflation”,“CPI-inflation” etc.
If M1 was growing while M3 was shrinking would that be inflation or deflation?
My understanding of the processes is not affected by semantics (varying definitions of inflation). Perhaps neither should yours.
Z.
What are you saying? Are you trying to make a virtue out of being imprecise?