What’s the Relationship Between the CPI and Increases in Bank Lending?

February 7, 2022

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2:27 pm

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16 comments

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Economics

Year-over-year changes in the CPI vs bank lending via St. Louis Fed (FRED)

I came up with the lead chart after reading this Tweet.

There are 2 tiers of money: financial money and real-economy money

Central Banks print reserves = financial money used by banks to transact with each other

Zero effect on CPI

Bank lending and govt deficits create new bank deposits = real-economy money

Potentially inflationary

— Alf (@MacroAlf) February 6, 2022

The lead chart shows no relationship between bank lending and the CPI.

Loans and Leases vs CPI Index

*CPI index (right) vs bank lending (left) via St. Louis Fed (FRED)*

Alf is correct about central bank reserves. But after having played around with various ways to look at bank lending vs the CPI, I draw a blank, as I expected.

However, I did find another example of how things went haywire after president Nixon ended convertibility of gold.

People are looking for the source of recent inflation but it isn’t bank lending or velocity.

CPI Fatally Flawed

One key problem is the CPI is a fatally flawed measure of inflation. It does not track housing or financial bubbles.

Those looking for inflation and not looking at asset bubbles are missing nearly the entirety of inflation.

Yet, consumer inflation did pick up. Why?

Source of Recent Inflation

Three rounds of fiscal stimulus (true helicopter drop money)
Supply chain disruptions due to Covid-19
Change in consumer spending preferences for goods over services.

Points one and two should be self-explanatory. Point three is also related to Covid-19.

People reduced eating out, going to the gym, and going to movies, etc. Those working from home wanted new home office equipment. A stock market boom fueled demand for cars and other goods. Working from home increased demands for suburban homes.

Consumers were full of cash they wanted to spend from three rounds of free money. Then the preference for goods jumped although the number of available workers contracted.

Add that up and you get a huge jump in inflation.

Missing Inflation

Looking for more inflation the BLS didn’t find? Please consider The National Rent Index Is Up 17.8% Year-Over-Year, the BLS Says 3.3%

Also recall that home prices are not in the CPI but prices are up 18%.

For discussion, please see Home Prices Jump Another Percent, Fed Extremely Behind the Inflation Curve

This post originated at MishTalk.Com.

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PreCambrian

2 years ago

Alf said “potentially inflationary”. He is right. As long as banks lend with the intention of getting paid back, lending won’t be very inflationary since they will be looking at cash flow for repayment ability. That is why the increase in bank reserves didn’t produce any CPI inflation. As long as the government runs deficits (borrows) with the intention of paying it back it won’t be inflationary either. The borrowing should produce increased cash flow by increasing GDP and taxes collected. However the US has long passed the point of intending to pay back the borrowing. The stimulus (helicopter money) falls under “government deficits” and there is no intention on paying it back. It is quite inflationary. I don’t see any way out. Eventually it will be forced upon us because other countries that actually produce goods and services will be tired of living poorly while working when the US lives large while resting on a recliner. Very few people in the US realize what it is like to worry about the value of your money. The value of the dollar would have to decrease by 27% just to bring our import value down to our export value.

Counter

2 years ago

So the effect of bank credit depends on its quantity and quality — the latter defined by whether it is used for unproductive transactions (credit for consumption or asset transactions, producing unsustainable consumer or asset inflation, respectively) or productive transactions (delivering non-inflationary growth). Credit used for productive transactions aims at income growth and is sustainable; credit for asset transactions aims at capital gains and is unsustainable. When credit creation slows after an asset bubble driven by credit for asset transactions, the ensuing fall in asset prices, capital losses and non-performing loans can easily trigger a banking crisis (banks have less than 10 per cent of equity; a drop of their asset values by little more than 10 per cent implies bank insolvency). Richard Werner

TheCaptain

2 years ago

Nixon didn’t “end” anything. The scam that the US perpetrated on the world saying it had the gold to back the dollars which were used for chicken in every pot, car in every driveway, the moon shot and vietnam simply collapsed like all scams eventually do. All Nixon did was to announce the formal collapse of the lie. He had no choice but to do this or let everyone have their gold back. And it wouldn’t be much of a scam if everyone got made whole now, would it. And even if he had wanted to make everyone whole, he couldn’t. So there is really no more harm in defaulting on everyone than in defaulting on half of everyone. Thus, better to default on everyone because default is the only possible outcome from this kind of money scam.

Fake money will always return to its inherent value of zero, and generally when you can least afford for it to do so.

amigator

2 years ago

All good information. Let’s not confuse inflation with rising prices. Rising prices can be a result from inflation of the money supply. That agrees with Alf (potentially infilationary).

Bernanke found a way to inflate the money supply that will not produce a dramatic rise in prices by narrowing the access to the inflated money to essentially the banks and not to the common man. All items that the banks like to play around in stocks, real estate and loans (to very wealthy individuals/companies) have inflated tremendously and it is no mistake that these items are not in the computed CPI.

He had a little help with the offshoring of many of our supplies/products used throughout the USA. With the push to have theses products produced in the good ole USA there is no way there can not be increases price we can make these items for the same hourly rate as china or vietnam.

RonJ

2 years ago

“People reduced eating out, going to the gym, and going to movies, etc.”

Peloton was running so many ads. Now they seem to be going bankrupt. Lately, i have seen a major ad campaign for Planet Fitness. They even extended their price offer. Back to the public gym.

EGW

2 years ago

Bank loans do increase the money supply in a fractional reserve banking system. But an increased money supply doesn’t always mean higher inflation. Inflation depends on whether the money loaned is being put to more productive uses and where the money is being spent in the economy.

StukiMoi

2 years ago

Reply to EGW

“But an increased money supply doesn’t always mean higher inflation. ” Yes it does. An increased money supply IS an inflated money supply.

Noone goes out and spends their money on what they consider non-productive uses. Exactly which one, out of all possible, usesan actor chooses to spend his money on, is the one he considers the most productive, By definition. And noone knows better than he does, which is the most productive use for his money.

Tony Bennett

2 years ago

Bank lending and govt deficits create new bank deposits = real-economy money

Potentially inflationary

…

Sure … and, uh, potentially disinflationary / deflationary if bank lending tightens and / or government deficits shrink (or turn to surpluses).

Enjoy inflation while you can …

KidHorn

2 years ago

Inflation is always a function of supply and demand. Of course giving people money means you increase the supply of people who can now afford a product, so that increases demand.

I think most of the current inflation is due to lack of supply. The FED has been printing for a decade now and we didn’t have much consumer price inflation until COVID hit.

StukiMoi

2 years ago

Reply to KidHorn

“Consumer price inflation” has nothing, whatsoever, in common with inflation. All “consumer price inflation” kinda-sorta indicates, is the degree to which higher-priority goods are arbitrarily omitted from some entirely arbitrary “consumer price index” or not.

If inhalable oxygen was arbitrarily omitted from the CPI and its availability/supply arbitrarily restricted by the self serving whims of some oxygen board, you could print more than the Zimbaweans did. And every single printed penny would simply be spent on oxygen. Ditto, albeit perhaps to a very, VERY slightly lesser degree, housing. As well as the feeling of safety entailed by having a cushion of savings.

In either case, you’d still have massive inflation as far as economics is concerned. Along with ALL of inflation’s disastrous distortionary effects. All of them. Exactly which “goods” are arbitrarily included in a CPI or not, has exactly, completely, 100%, zero relevance whatsoever.

You would not have so-called “inflated” prices of a “basket” arbitrarily chosen to consist solely of green cowboy hats cowered in puke, and other goods similarly far down the list of people’s priorities. Which has exactly zero economic relevance whatsoever.

Eddie_T

2 years ago

Banks doesn’t make mortgage loans anymore. We talked about that. So…..isn’t one of the main ways money gets into the broad money supply through the creation of mortgage loans? That’s BIG money. Chart CPI against new mortgage credit.

Eddie_T

2 years ago

Reply to Eddie_T

2.56 Trillion increase in mortgage debt just since 2019. That is money that all gets spent. Inflationary? You tell me.

link to statista.com

TexasTim65

2 years ago

Reply to Eddie_T

I don’t think it’s as simple as +2.56 trillion injected into the economy.

If you sell a house for 100K and I buy it from you and finance with 10 down and a 90K mortgage the banks (or mortgage securities or who ever buys my loan) don’t print 90K to give to you. That 90K comes from them (whether it’s bank reserves or a bunch of pensioners who own an mortgage security in their IRA/401K).

Where more money gets injected is via the interest payments over time. So it’s a steady dribble rather than a giant cash dump.

Eddie_T

2 years ago

Reply to TexasTim65

If I sell the house I get the entire 100K. Assuming I owned it outright, I owe capital gains tax of 20% and the rest is mine to use to buy anything I want. How is that not a new part of the broad money supply? The interest on the loan goes to the investors, but I get cash money.

Karlmarx

2 years ago

Its not a relationship between lending and inflation but lending and wealth. Map against the GINI coefficient and you will see what has created the entire progressive movement and the swing in millennial thinking towards socialism. Very similar to the 1860s when Marx was describing the economic laws of motion and the concentration of capital leading to a socialist revolution. History repeats

RonJ

2 years ago

Reply to Karlmarx

“History repeats”

Cycles repeat. They say human nature never changes, but it does have cycles, as does anything else, other than a straight line. Past is prologue. What is old becomes new again, as a cycle returns to the same phase.

People are happy in good times and miserable in bad times. By the 1970’s a mantra was, never trust anyone over 30. Those people are now over 60 and the under 30’s are supposed to trust them.

What’s the Relationship Between the CPI and Increases in Bank Lending?

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