Inflation is the result when money supply growth outpaces an economy’s ability to produce goods and services.
We use M2 in the below chart to represent the money supply (the thin blue line). We use the The Producer Price Index (PPI) and Real GDP as productivity proxies. The PPI is measured by the thin red line and Real GDP is measured by the thin green line.
- M2, PPI and Real GDP are displayed as the percentage change from the year ago period.
- M2 and PPI are plotted monthly, Real GDP is plotted quarterly.
- Note the spread in M2 vs. PPI and Real GDP from the Feb 2020 through the present period.
- M2 growth is about to accelerate again as Biden’s Infrastructure program will require the Fed to print $1 Trillion-plus.
- Further, Biden’s Green/Social spending plan will require that the Fed print an additional $1 Trillion-plus. Thus, 5-10% inflation as measured by the CPI will persist beyond 2022.