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A Monetary Debate: Is Sustained Inflation Coming? Is Powell Delusional?

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20 comments on A Monetary Debate: Is Sustained Inflation Coming? Is Powell Delusional?

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Sustained Inflation?

“Powell Is Delusional”

“Powell is delusional. The explosion in the US money supply means that there will be sustained inflation.“

Really? 

Money Supply Measures

M2 Money Supply vs the CPI

The above chart suggests there is no relationship at all between consumer prices and money supply. 

Inflation Calls

We have been seeing inflation calls from the same people for decades. Finally the CPI is rising.

But the CPI is a very poor measure of inflation. It’s not even a good measure of prices. 

Distortions Abound

On July 16, I wrote The CPI Measures Inflation and Other Widely Believed Economic Nonsense

“The CPI is a piss poor measure of inflation.” And It’s not even a good measure of prices. 

Is money finally influencing consumer prices more so than assets? For how long? What’s “sustained”?

Is inflation transitory? That’s the question on everyone’s mind.

 “What Would it Take for Me to Change my Mind on Inflation?”

On June 30 I addresses a reader question: “What Would it Take for Me to Change my Mind on Inflation?”

Since then I have identified one more thing. I will discuss that in a subsequent follow up post.

Mish 

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Mish

Mike Shedlock

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Intelligentyetidiot
Intelligentyetidiot
2 years ago
Mish, your chart M2 to CPI is misleading as it shows a rate of change not cumulative effects.
Milton Friedman was right, “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”
Problem is how we define output. 
If you consider the price of a basket of products only, you are never going to get the true picture, but if you considers the prices of all assets and all other consumer products you will see that Friedman’s relationship holds.
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Casual_Observer
Casual_Observer
2 years ago
Will be? It has been since the financial crisis. 
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Carl_R
Carl_R
2 years ago
I read your chart comparing M2 to CPI differently than you do. It appears that they have a “normal” level with CPI about 5% less than M2 growth.  It is not fixed, however, and there can be deviations that last for up to a year or two. The CPI was higher than that relationship would have predicted in 2010 and 2018, and is currently lower. Will it return to it’s historical norm? If so, will it be by inflation rising, or by M2 growth falling, or a little of both?
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Dr. Manhattan23
Dr. Manhattan23
2 years ago
I think some of the higher prices will stick, but let’s see what happens when all the effects of the stimulus runs out, and eviction moratorium ends. No more mortgage forbearance or school loan forbearance. This is deflationary in my opinion. How about when the supply chain gets back to normal. Wood prices have come crashing back down to earth. The price increase appears to be a result of supply chain disruptions and manufacturers bringing more capacity back online. Same goes for meat. Lots of slaughter houses closed or had employees get covid. This decreased the supply of beef temporarily. Now that demand has rebounded, there isn’t enough supply. The sky rocketing prices in cars is due to the chip shortage. How long it will last, no clue, but when it’s over, prices will fall back down. I will say that I think some of the increased prices will stick, but not all. Oil prices are high right now, but oil producers cut supply last year, and they were just arguing about increasing supply, and I believe they just agreed to increase production
Although some price increase will be transitory, I don’t think all will. There will be some permanent price increase baked in
As for sky high prices in real estate and the stock market, I have no clue…..
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Eddie_T
Eddie_T
2 years ago
If rents go up and property values go up, CPI-U can go anywhere it wants, and I’m okay with that.
In my view the best way to deal with wealth inequality is to make personal decisions that result in helping yourself become more affluent. It’s far more effective than complaining.
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Too much BS
Too much BS
2 years ago
Powell is not delusional.  He’s a stock market pumper.
Nothing else matters, only the stock market to Powell.
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KidHorn
KidHorn
2 years ago
The money isn’t going to the masses. it’s going to the super wealthy. The super wealthy already have enough cars, homes, boats, etc… so they put their money in investments. So I expect to see a lot of investment bubbles, but not much overall inflation. Inflation will only occur if wages go up and/or supply goes down. Right now inflation is primarily driven by supply issues. Not demand. Once covid is done, supply will catch up to demand.
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Scooot
Scooot
2 years ago
Reply to  KidHorn
Covid won’t be done. It’s here to stay and we have to live with it. Vaccinations are helping to reduce the degree of illness but it’s still very contagious and vaccinated people still get it. We’re seeing this in the UK. The policy seems to be to let whoever catch it now and get on with life. People still have to stay off work if they get it, or have been in contact with it, so it’s still very disruptive. Currently it’s the Delta variant and we await the next new variant.  
On top of that severe weather events around the world are compounding the problems and these are only likely to get worse and become more frequent. I therefore think supply chain disruptions are going to carry on for a long time.
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Eddie_T
Eddie_T
2 years ago
Reply to  Scooot
Numbers of infected are turning up here. The local county where I practice went “code red” today, which basically means masks and social distancing are recommended. But I see maybe one person in a hundred wearing a mask now. Our guidelines for healthcare offices are still strict, and we make patients wear masks, and we still force social distancing. I’m all for continuing to do what has worked for us as providers…and it has worked beautifully. 
Knock on wood, though. It aint’ perfect.
We are at about 70% fully vaccinated now, and for the over 65 crowd it’s much higher….just over 90%. 
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KidHorn
KidHorn
2 years ago
Reply to  Scooot
Covid will fade. What severe weather events over the past year or so have contributed to inflation?
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dbannist
dbannist
2 years ago
Reply to  KidHorn

Heat has contributed to inflation.It’s made electricity much more expensive in many areas.Heat has also added to the price of lumber by making fires more likely to shut down lumber yards.  It wasn’t the only reason but it certainly was one.Food inflation is a thing for sure.  I’m sure by now you are aware that there are massive problems irrigating vast swaths of our country right now that produce food.  Weather absolutely makes a difference on priced goods….it remains to be seen however if it is transitory or not.

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Scooot
Scooot
2 years ago
Reply to  dbannist
Insurance premiums will rise as well. They’ll also be attempts to improve or build defences to help mitigate the effects adding to costs. 
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KidHorn
KidHorn
2 years ago
Reply to  Scooot
That’s a new one. I haven’t heard inflation is being driven by rising insurance costs.
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Scooot
Scooot
2 years ago
Reply to  KidHorn
You’ve lost me, I buy house contents and building insurance, if the premium rises, it increases my cost of living, which I’m calling inflation. Businesses buy insurance, if premiums rise their costs increase? 
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KidHorn
KidHorn
2 years ago
Reply to  dbannist
Seriously? You think this has been a major contributor to inflation? Haven’t we had heat in past years? The west has fires every year. And lumber prices have recently dropped at the same time the fires have gotten worse.
Has irrigation suddenly become much more difficult this year?
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Scooot
Scooot
2 years ago
Reply to  KidHorn
Have you seen the devastation across Europe caused by the recent floods. I can’t imagine it’ll  help supply chains at a time when they’re already under immense strain.
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Doug78
Doug78
2 years ago
Reply to  Scooot
Don’t worry. The next big thing is Monkey Pox. It’s perfect for increasing viewership. It has low transmissibility but a high death rate. A Chinese scientist recently caught it and died. It’s related to Smallpox to boot.
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Eddie_T
Eddie_T
2 years ago
Reply to  Doug78
I saw the pics. Nasty.
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Eddie_T
Eddie_T
2 years ago
Reply to  Doug78
There is a case in Dallas. Somebody who flew in from Nigeria within the last week. There are only. very few examples of monkey pox ever infecting  a human. Hopefully it is not going to be the next COVID.
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Scooot
Scooot
2 years ago
Reply to  Doug78
I was’t particularly worried, nothing I can do about it. Hopefully I’m being too pessimistic.
I was just offering an alternative to the transitory inflation spin. May well be wrong, I also think global growth is going to be non existent which doesn’t fit with an inflationary environment. 
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