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

Question of the day: Does a surge in bank lending lead to a surge in inflation?
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Year-over-year changes in the CPI vs bank lending via St. Louis Fed (FRED) 

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.

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) 

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. 
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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

Case-Shiller Home Price Index National and Top 10 - 2021-11

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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