Why inflation might be coming down

In yesterday's post I said the Consumer Price Index was up just 0.16% from June to December last year (although that is not seasonally adjusted). But that was after it went up 7.0% in 2021 and was up 6.2% in the first six months of 2022. Here are a couple of articles that address why.

See How Japan Kept Inflation Rates Low by John Greenwood and Steve H. Hanke. Excerpt:

"As [Nobel Prize winning economist Milton] Friedman said long ago, “I know of no exception to the proposition that there has been a one-to-one relation between substantial rises in prices and substantial rises in the stock of money.” Recently, one of us (Mr. Hanke) completed a study of 147 countries from 1990 to 2021. The correlation between the growth rate in those countries’ money supplies and inflation rates was 0.94, close to Friedman’s one-to-one relation. Changes in the money supply and changes in inflation are clearly joined."

See M2 graph from the Federal Reserve bank of St. Louis.

The graph shows that the money supply (as measured by M2) started increasing rapidly in Feb. 2020. But in March 2022 it started to decrease a bit. So the high inflation mentioned above in 2021 and the first half of 2022 could have been caused by the rapid increase in the money supply and the more recent, lower rate of inflation might be due to a decline in the money supply (what exactly is part of M2 is given at the end of this post).

M2 was up 19% in 2020 and 16% in 2021. From March 2022 to Nov. 2022, M2 was down about 1.8%.

See also Inflation Is Turning the Corner by Greg Ip. Excerpts:

"When Fed officials first used the word transitory, it was widely interpreted as “brief.” A more nuanced interpretation was that many prices were rising because of idiosyncratic supply-demand imbalances that would wash away as the economy normalized."

"gasoline, which hit an average of $5 a gallon in June, is now down to $3.27"

"Prices of long-lasting goods, especially automobiles, shot up as locked-down consumers splurged and parts shortages drove up prices. But demand for such goods has softened as the pandemic recedes and the parts shortage improves."

"The pandemic and ultralow interest rates fueled a boom in purchases of larger houses or houses in different parts of the country. Meanwhile, builders struggled with shortages of land, materials and workers. All those factors have receded, and home prices are now falling and new rents rising much more slowly."

Here is the info about M2 from the St. Louis Fed. 

"Before May 2020, M2 consists of M1 plus (1) savings deposits (including money market deposit accounts); (2) small-denomination time deposits (time deposits in amounts of less than $100,000) less individual retirement account (IRA) and Keogh balances at depository institutions; and (3) balances in retail money market funds (MMFs) less IRA and Keogh balances at MMFs.

Beginning May 2020, M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. Seasonally adjusted M2 is constructed by summing savings deposits (before May 2020), small-denomination time deposits, and retail MMFs, each seasonally adjusted separately, and adding this result to seasonally adjusted M1."