Tuesday, June 24, 2008

Are Concerns About Inflation Inflated?

M2: Percentage Change from Year Ago
M2: Monthly Percent Change, At an Annual Rate
The charts above (click to enlarge) are from the St. Louis Fed's most recent "Monetary Trends" report for M2 growth on a: a) percent change from a year ago basis (top chart), and b) monthly percent change at an annual rate basis (bottom chart).

If stability in the growth of M2 was one measure of monetary policy stability, it would seem like the Fed has been doing a pretty good job. The year-to-year change has been steady at about 5% in 2004, 2005, 2006, 2007 and 2008. It's almost as if the Fed has had a fixed money growth rule for M2 of 5% per year since 2004. Although the month-to-month annualized change spiked in early 2008, it is now down to about 0%.

Doesn't this mean that inflation should NOT be a problem?


At 6/24/2008 9:36 PM, Anonymous Anonymous said...

So then what explains the significant fall in the foreign exchange value of the dollar over the last few years? I assume you're willing to attribute the run-up in oil prices to an increased demand from emerging markets throughout the world. But what about gold? The price of gold in USD per ounce has about tripled since 2000. I don't know what else could explain that other than significant inflation, as I doubt the demand for gold products has risen by so much. Perhaps the inflation is showing up in other forms? I'm not an expert, but if I've understood the news correctly, the Fed has been preoccupied with swapping fairly liquid assets to banks for their frozen assets. I've read that these actions have taken up approximately half of the Fed's balance sheet (from 800 to 400 billion). Could an explanation of inflation come from there?

At 6/24/2008 10:20 PM, Blogger Vijay said...

It seems to me that the major confusion that many people have, especially in the media, is what inflation actually is. Many will often use inflation to refer to price inflation and then later refer to inflation in the monetary sense.

The two are distinct, and the distinction is key to understanding what is occurring right now.

I highly recommend this blog post by my friend Jon.

It is possible to have both monetary deflation and rising commodity prices if there is diminished demand for the underlying currency in which the commodities are being priced.

Mike Shedlock (whose blog is excellent) makes an excellent case that we are facing monetary deflation right now.

At 6/25/2008 2:37 AM, Anonymous Anonymous said...

More foolishness from this moron. I doubt Ill come back to this site-this guy hasnt a clue about the business world, nor does he probably even buy groceries for himself.

Inflation is not just a measure of money supply internally its also a measure of how much that money will actually purchase in goods and services. USD collapse has escalated oil prices which has found its way into everything non discretionary. While we have deflation in financial assets, we have inflation in non discretionary items, items that used to be elastic in demand, are no longer. Its called Stagflation, Professor Clueless.

At 6/25/2008 7:14 AM, Anonymous Anonymous said...

Anon. 2:37

I guess you did not like through the 1970s like the rest of us.

P.S. This blog is a discussion of ideas not an excuse for ad hominem attacks against Prof. Perry or anyone else. I hope that you will decide not to visit again since it would seem apparent from the simplicity of your ideas that you have little to contribute aside from rudeness.


Thank you for the interesting links.

At 6/25/2008 8:09 AM, Blogger Unknown said...

Dear prof. Perry:

Plotting percent M2 change from a year ago, noting the "steady" change of 5% and then trying to argue about inflation is a straw man.

To start with, an average of a 5% change from a year ago for the last 20 years is a lot. Using the 72 rule, M2 doubles in value in about 14 years. That's a lot of money.

Why haven't we seen inflation then in the pervious years? One possible explanation is that up to recently we had financial asset inflation that peaked in 2000 with the dot com bubble.

Since the time financial assets lost their appeal, money started flowing into commodities. We now witness the results of this shift and inflation will rise.

To summarize, it was the flow of money into financial paper assets that prevented inflation from rising in the late 90s up to last year. Now that financials and also industrials are correcting, inflation will rise as a result of an irresponsible and reckless monetary and fiscal policy of the last 15 years or more.

America needs to go into a deep recession to correct the excess and this means rates must go up to maybe 7% or more soon, otherwise dollar will plunge more, oil will skyrocket more, commodities will rise and inflation will go to previously not experienced levels with great impact to economic and social stability.

Another solution would be to decouple dollar from commodities. Make commodities payable in gold or something else. Maybe the Europeans would like to have oil priced in Euro (if they are stupid enough, which is maybe the case) Lose your prestige for keeping your dignity and stability.

You can't have your cake and eat it too.


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