Milton Friedman Rides Again
The top chart above is from a previous CD post, and the bottom chart above is from Larry Kudlow's blog, and he featured it last night on Kudlow and Company. I used a three year lag in my chart, and Larry is using a two-year lag in his graph, which might be a slightly better fit. But the main point is that money supply growth takes between 2-3 years to have its full impact on the price level and inflation.
The significant decline in the growth rate of M1 over the last few years (and the monetary base as well), suggests that inflation could likely decrease in 2008 and 2009 from its current year-end level. M1 growth has actually been negative for the last year, and the M1 money supply today is below its level a year ago, suggesting that inflation won't continue to be a problem much longer.
2 Comments:
Let's see if an inflation plunge is viewed as a deflation risk.
Why a 2 year lag? Is the uncertainty about the change so great that the markets can't cope with it and take two years to feel its effect?
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