A Macro analysis of consumer inflation and deflation

Mike Shedlock, the original founder of the TMF board which was renamed the “Macroeconomic Trends and Risks” (METAR) Board after he left TMF, has analyzed the Macro economy for decades.

Mike has certain biases. He has pure contempt for the Federal Reserve. He has a bias toward predicting deflation and for claiming that deflation is beneficial rather than harmful (thus disagreeing with the Fed). He believes that the FDIC should be abolished. Mike is a bear to the bone. When he ran this board (which he named after himself, “Mishedlo”) he deliberately ran off any poster who disagreed with him.

Mike has just posted an intriguing essay called, " Is Inflation Always and Everywhere a Monetary Phenomenon?"

The well-known quote is an incomplete quote from the Nobel Prize-winning economist, Milton Friedman. The complete quotation is, “Inflation is always and everywhere a monetary phenomenon, in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.”

We need to note that increase in the quantity of money can be supplied by Congress (fiscal stimulus), the Federal Reserve (monetary stimulus) and bank lenders (and non-bank lenders).

We also need to note that inflation broadly breaks down into consumer price inflation and asset price inflation (stocks, bonds, real estate, etc.).

METARs are personally affected by both.

  1. Consumer price inflation impacts us directly by raising the cost of buying goods and services.

  2. Consumer price inflation (CPI) is used to calculate the value of inflation-adjusted bonds, including I-Bonds and TIPS, which METARs may own.

  3. Consumer price inflation (especially PCE inflation) influences the Federal Reserve’s monetary policies.

  4. Asset price inflation (and deflation) affects the value of our homes and investments. Asset prices are directly impacted by interest rates, which are controlled by the Federal Reserve. We can see how the increase in the 30 year mortgage rate has punctured the housing price bubble. We can see how the decrease in margin debt has correlated with the puncturing of the stock market bubble.

Asset price inflation and deflation are not necessarily correlated with consumer price inflation. Federal Reserve adjustments of interest rates do not put much money into consumer pockets, which is why years of zero to negative REAL fed funds rates did not lead to consumer price inflation.

As Milton Friedman said, consumer prices increase when the supply of money to consumers grows faster than the growth of goods and services that consumers buy. The money in consumer pockets comes from earnings, transfer payments, consumer borrowing and drawing on consumer savings. Some of it is in the form of M2 (cash and checking accounts) but a lot of it isn’t counted as M2.

For example, I just got a raise in my Social Security for 2023 which is an inflation adjustment of my 2022 Social Security. I anticipate receiving 8.7% more in 2023 than in 2022. This could encourage me to spend more even though I don’t have more in my savings and pocket right now. (M2 is not changed.)

Let’s look at the money available to consumers which can be spent on goods and services. Is this growing faster than productivity?

Total Wages

Total Transfer payments

Consumer saving

Consumer credit


It’s clear from these charts that the money available to consumers from employment, credit and transfer payments is growing much faster than labor productivity.

The fiscal stimulus from the Covid-related helicopter money has been spent. Consumer savings rose fast, driving inflation, but have dropped below the 2019 level.

CPI growth has fallen in the past few months. This directly impacts TIPS since their principal and interest payments are based on the CPI.

This can also be seen in the PCE index, closely watched by the Fed.

M2 represents the money that consumers can spend right away. M2 is a measure of the U.S. money stock that includes M1 (currency and coins held by the non-bank public, checkable deposits, and travelers’ checks) plus savings deposits (including money market deposit accounts), small time deposits under $100,000, and shares in retail money market mutual funds. As Mish said, M2 has been falling for the past few months. But it is still far above its 2020 level. The absolute numbers are much less noisy (and much less dramatic) than the “change from year earlier” chart that Mish shows.

And remember, the cash, checking and savings accounts do not include increases in wages, borrowing and transfer payments.

The Federal Reserve is especially focused on increasing wages which have, in the past, resulted in a wage-price spiral inflation which is sticky.

In conclusion, I think the data show continuing consumer price inflation. The Fed is trying hard to slow the economy and this is happening slowly.

Do I see deflation?

I think that stagflation is more likely than deflation.

Attention: @Notehound7


To Wendy’s very fine analysis, would like to add, for those who have lamented the lack of interest-paying bank accounts over the past few years:

It is not the interest on your account which is important, but the difference when subtracted from inflation (especially since income taxes are paid on the income while not if it was missing. You will likely net a lower purchasing power despite the interest collected if inflation continues to rise faster than interest rates paid to you (as opposed to what banks might pay)




There are deflationary forces. Chief among them is the manufacture of goods.

Energy policy is also a deflationary force.

Transportation policies can be deflationary forces by increasing productivity.

When Friedman says it is a monetary phenomenon he is talking about inflation.

Note Friedman always got the wrong results. Samuelson proved that about Friedman for decades.

What Friedman was not talking about in that quote were deflationary forces. Interestingly enough Friedman had no clue how to grow the US economy. He came up with all sorts of nonsense that never panned out for our country. Like cutting taxes will grow the economy as the wealthy reinvest. Never happened. The economic growth just slowed down. Friedman had a sense of himself that was garbage.

Mish quote…

“If you insist that increases in money supply constitute inflation, then you must also insist that we are in a period of deflation right now.”

Mish begins in the wrong place entirely. His discussion of the money supply falls flat. It is not factual or reality based.

Bottom line we are getting our industrial base back. We are building our infrastructure and changing our energy sources.

As I have long stated I want deflationary policies. Now I am saying when we see the FED/Treasury print we will see small amounts of inflation over the next two decades but most of the printing will go to fiscal policies and very high GDP growth in many years. We will see reductions in the federal debt load.

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Yep, I’ve been harping on this for awhile when discussing the issue with people who are jubilant over 4+% CD rates.

Last year: earn 0.5%, tax is 0.175% of it leaving 0.325%, minus 2% inflation leaves me with a net -1.675% yield.

Now: earn 4%, tax is 1.4%, leaving 2.6%, minus 6.5% inflation leaves me with a net -3.9% yield.

But to add insult to injury, sometimes all that phantom income pushes you above certain income limits that cause added taxes or limitations on certain valuable credits.

It’s horrible.


I checked CPI and PCE inflation index values since June 2022, when year-over-year inflation peaked (chart below).

The recent data indicate something different than inflation being high for a prolonged period, like you have been saying along with you referencing stagflation.

Over the last five months, Jun to Nov inflation numbers, CPI changed 2.47% annualized and PCE Price Index changed 2.42% annualized, quite a reduction in inflation and not too far from 2%. And the economic outlook, including the job market, is for slowing down, which is not very inflationary (supply shocks are a different matter). Some other recent posts make similar points (I agree with me, Job growth strong, wages growing - #3 by Arindam).

CPI 2022

Jun Nov % Change % Change Annualized
295.328 298.349 1.02% 2.47%

PCE Price Index 2022

Jun Nov % Change % Change Annualized
123.512 124.747 1.00% 2.42%

CPI (Consumer Price Index for All Urban Consumers: All Items in U.S. City Average (CPIAUCSL) | FRED | St. Louis Fed)
PCE Price Index (Personal Consumption Expenditures: Chain-type Price Index (PCEPI) | FRED | St. Louis Fed)

It’s funny, pre-pandemic the Fed was so worried about deflation and even said that they were comfortable with inflation running a bit above their 2% target, which is probably about where we are now (in the U.S.). Is the Fed on the verge of another over-correction? I think maybe yes.

Recent Fed Over-Corrections

  • Pre-Pandemic: Held rates too low for way too long because of deflation worries, causing asset bubbles.
  • Pandemic: Slow to raise rates from 0% as economies re-inflate while emerging from the various pandemic shocks.
  • Post-Pandemic: Raising rates too high for too long in the face of slowing inflation (recovering supply chains, economies), a slowing job market and economic headwinds ??? (to be determined)

Overall, I respect the Fed, especially the chairs because I feel they are trying sincerely and with much effort to meet their mandate. But I do think they have over-steered a few times, unfortunately.


Yes, he had several idiotic biases. We have seen what happens without FDIC. There’s no FDIC for crypto - or regulation either. How’s that working out, again?

For that matter have have a whole century of what happens without a Fed. And that Bear case has worked out well for the past, uh, 70 years?

As for Friedman, slogans are hard to overcome. We have inflation now, largely because of supply chain snafus and dramatic changes in consumer behavior thanks to outside events, but consumers were “finding money” in their houses and credit cards with or without helicopter money.

We are not in stagflation. We are not going to be in stagflation. Hiring is strong, even with a slowing economy. Paychecks continue, and those being headlined as “LAID OFF” are finding jobs in the shortest periods in recent history. The economy is soaking up those tech workers and others at the top, even as “help wanted” signs litter the parking lots of every strip mall in America for the others.

The wild card here is misuse of government power, but I won’t go there; I’ve opined elsewhere on that. Otherwise the airplane is coming in. Not perfectly, perhaps, but I expect a competent landing with all passengers and baggage accounted for, well, perhaps a bad analogy given the state of the airlines these days, but things are pretty well OK. Don’t worry. Be happy. Run your bonds short, and your stocks stalwart.


stag·​fla·​tion ˌstag-ˈflā-shən
: persistent inflation combined with stagnant consumer demand and relatively high unemployment

I agree with @Goofyhoofy . We are not in stagflation. At least here in Texas, help wanted signs everywhere, and LOTS of people buying stuff, traffic into/ out of shopping centers, food places, etc. Consumers are consuming.



We are clearly not in stagflation. Nobody (especially folks who lived through the real stagflation of the 70s) warning about it could really believe we are in it already (3+% estimated GDP growth in Q4). I think [one of] the main thing[s] worrying them was the lack of productivity from millions of new employees recently. BUT, that may finally be turning around, recent productivity numbers are encouraging and moving in the right direction.

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The problem with stagflation talk is us. The boomers think about it as memories and apply the term.

The reality is very different. If we care to discuss econ, policy, employment and inflation lets talk today. Particularly lets look where we are going.