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.
Consumer price inflation impacts us directly by raising the cost of buying goods and services.
Consumer price inflation (CPI) is used to calculate the value of inflation-adjusted bonds, including I-Bonds and TIPS, which METARs may own.
Consumer price inflation (especially PCE inflation) influences the Federal Reserve’s monetary policies.
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 Transfer payments
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.