Updated: Jul 22, 2021
Gregory Heym is Chief Economist at Brown Harris Stevens. His weekly series, The Line, covers new developments to the economy, including trends and forecasts. Read on for the latest report and subscribe here to receive The Line in your inbox.
After some really scary May reports, both consumer and producer prices jumped again in June.
The Consumer Price Index was 5.4% higher in June than a year ago, while producer prices rose a record 7.3% during that time. The core CPI index rose 4.5% over the past year, its fastest increase since September 1991.
Federal Reserve Chairman Jerome Powell continues to say inflation is transitory, citing pent-up demand and supply-chain issues that will ease over time. Some economists also point out that year-over-year comparisons are distorted, as inflation was essentially non-existent at the height of the pandemic.
These are all valid points, but the Chairman seems to be forgetting the most important aspect in any inflation debate: the money supply. As I’ve said before, the best definition of inflation is too much money chasing too few goods. We all know that the pandemic has created shortages of many goods and services, but why aren’t more people speaking about the unprecedented increase in the money supply?
Since the end of February 2020, M2—which includes money in checking and savings accounts and some other things—has grown by 32%. This nearly $5 trillion increase in the money supply isn’t going to just go away like pent-up demand or supply issues. Look at this chart of M2 going back to 1980, and let me know if you see any noticeable declines over the past 40 years. I sure don’t.
This inflation data, combined with increasing good news on the jobs front, all highlight the need to taper the Fed’s asset purchases, and start bringing rates up slowly. Or, as Archie Bell & The Drells would say, they need to do the Tighten Up.