M2 charts look good

This blog is one of the few places you will find information about the all-important M2 measure of the US money supply. I've been covering this since I first began this blog in the summer of 2008. The reasons that few follow M2 are several: 1) the Fed apparently pays no attention to the money supply, 2) not many Wall Street analysts pay attention to M2, and 3) making sense of money supply is difficult in the absence of any concrete measures of money demand. I try to fill in those gaps.

These links will take you to a more in-depth discussion of this topic, but to simplify: Inflation happens when the supply of money exceeds the demand for it. M2 is arguably the best measure of money supply. Currency is arguably a proxy for money demand, as is the ratio of M2 to nominal GDP. The reason surging money supply in 2020 through early 2022 didn't create inflation is that money demand also surged. The reason that declining money supply over the past two years has not been deflationary is that money demand also declined. Today, money supply and money demand appear to be in balance, which explains why inflation has been relatively low and stable. 

Chart #1

Chart #1 shows the level of the M2 money supply. M2 grew at about a 6% pace from 1995 through 2019, a period characterized by relatively low and stable inflationm which further implies that money supply and demand were in balance. M2 then exploded from March 2020 through early 2022, but inflation started rising in early 2021; this implies that money demand started to collapse in early 2021. For the past year or so, M2 growth has picked up but inflation has slowed, which implies that money demand has begun to stabilize at a lower level (see Chart #2). 

Chart #2

Chart #3

Chart #3 shows currency in circulation (a lot of which is held overseas, by the way). I have argued that currency is a proxy for money demand because people only hold currency if they want to; unwanted currency can simply be deposited in a bank, whereupon it disappears from circulation and is returned to the Fed. Like M2, currency increased at about a 6% annual rate from 1995 through 2019. It then surged over the next year or so, even though we saw relatively low and stable inflation. The growth of currency then began to slow (and inflation to pick up) in early 2021, and has now returned to its long-term growth path, coinciding with relatively low and stable inflation.

In sum, money supply appears to be growing at a moderate but sub-normal rate, while money demand appears to be somewhat soft. That's not a recipe for rising inflation, and instead signals, in my view, that inflation will remain low and relatively stable for the foreseeable future. 

April CPI looking good

A quick update to my favorite CPI chart, following today's release of the April numbers:

The chart compares the year over year change in the CPI index with the same change in the CPI index ex-shelter. The ex-shelter version of the CPI has increased by 2.3% or less for the past 24 months (since May 2023), and it has averaged a mere 1.7% per year for almost two years. In the past year, overall inflation was 2.3%, and ex-shelter inflation was only 1.4%. Conclusion: only shelter costs (which I and many others believe have been overstated by faulty calculations) have kept the broader CPI from long ago meeting the Fed's objective, and their impact is continuing to fade away.

It's worth noting also that the April figures included the impact of some of Trump's tariffs, which resulted in higher prices for some imported goods. But this upward nudge to inflation was fully offset by a slower rise in prices for services. Which further illustrates how, when monetary policy is doing a good job, rising prices for some things are perforce offset by lower prices for others. 

More on Trump's terrible tariffs

Here is a must-read article on the folly of Trump's tariff policy: Trump’s Tariffs Are as Bad as Bidenomics, from the April 15, 2025 edition of the WSJ.

Key excerpts:

The logic of the Trump protectionist policy is that a nation can become richer by producing at home products that it could buy more cheaply abroad. Not only does this defy reason, but the administration has presented no evidence showing how the U.S. or any other nation has benefited economically from broadbased protectionist policies.

The president’s trade policies focus exclusively on manufacturing, never mentioning America’s massive surplus in the services sector, where wages are now on average higher than in manufacturing.

In 2018, Mr. Trump imposed tariffs on washing machines, raising the cost consumers paid for these appliances by more than $1.5 billion annually while bringing in only $82 million in customs revenue. Even after netting out the tax revenue, the average annual cost to American consumers of each job created by these tariffs was north of $815,000, roughly 19 times the average annual salary earned in 2018 by production-line workers employed in manufacturing appliances.

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Blogging will be light for the rest of the month since I am spending some time Italy.