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Tuesday, April 01, 2008

M1 Growth Versus Price Inflation

Gary North caused me to doubt my forecast of high price inflation when he pointed out that M1 had been virtually flat for years. In conjunction with (what was to me) a shocking flat CPI for February, it was enough to make me squirm.

But as this FRED chart shows, annual % change in M1 is almost the mirror image of the same in CPI. In particular, during recessions M1 growth usually drops through the floor, while CPI growth goes through the roof. (Yes that's right, inflation goes way up during recessions, at least since the mid-1960s.)

BTW, if anyone knows how I can embed these FRED graphs directly in the blog post, please let me know.

6 comments:

  1. There should be an image icon when you are composing your post. Upload the picture and place accordingly.

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  2. Or you can hot-link to it using this link.

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  3. during recessions M1 growth usually drops through the floor, while CPI growth goes through the roof. (Yes that's right, inflation goes way up during recessions, at least since the mid-1960s.)

    This is classic Austrian economics. A slowing money supply stops growth in the capital goods sector, while the prior money growth works its way through the economy re-establishing old consumption-savings ratios in favor of consumption, thus causing a climb in CPI.

    What is different about the current period is the divergence between M1 and M2. Generally, they move in tandem. Currently, M1 is flat, while M2 is soaring. This divergence, which North simply ignores, needs to be explained.

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