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Before we build on our money supply curiosity, I would like to mention that I've recently read reports and twitter posts related to this matter. More specifically, Andreas Steno from Steno Research, and the desks at UBS and Nomura
We saw measures of money supply spiked on the Covid crisis as monetary and fiscal policy tools intervened to support the economy. The chart below shows headline inflation moving higher on the lagged effects of an increase of money in circulation
The rise extended into 2021, M1 had jumped by more than 350% Y/y by February, M2 increased by 27% Y/y. The latter turned negative in December, it tracks a decline of 2.4% Y/y as of February 2023
We have rarely seen periods of contraction in M2 money supply, Federal Reserve data goes back to 1960. Keeping in mind this could take some time to filter into the real economy and prices, we could see U.S. inflation back in target in less than a year. This would be somewhat earlier than what the Fed expects
Of course, the Federal Reserve targets the core PCE deflator, but we saw them react to the headline CPI figure back in the middle of 2022
If the relationship between total amount of money in circulation and prices holds, this could mean that we head into a period of disinflation in the U.S. and perhaps in developed markets
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