Inflation as measured by the CPI will persist above the Fed’s target rate of 2% over the long-term. Why? Because as Milton Friedman said: “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.” Simply stated, if the Fed prints money at a rate that is faster than Real GDP growth, the excess liquidity will result in price inflation.
The money supply as defined by M1 has consistently expanded at a rate in excess of Real GDP growth over the past number of decades. The below chart details quarterly observations of the year-over-year percentage change in M1 compared to the percentage change in Real GDP dating back to 2000. M1 is the green line, Real GDP is the thin blue line. The periods where M1 growth swelled to over 300% for multiple quarters was of course when Jerome Powell’s Federal Reserve printed money in support of fiscal “stimulus” under Presidents Trump and Biden. We are now paying the price for that foolish fiscal policy in the form of record inflation. Yes, record price inflation for if we accounted for CPI as it was accounted for in the 1980s the CPI would read north of 15%, to say nothing of the inflation we have experienced in asset classes outside of the CPI calculation.
The Fed expands M1 to subsidize fiscal deficits, to subsidize fiscal spending programs, and to run monetary policy operations such as the illogical and ill-advised QE program of the past decade-plus (recall that QE was supposed to be a one-off event in 2009). The Fed serves a number of masters including the Executive Branch, The Legislative Branch as well as the Debt and Equity markets. The U.S. economy, sound money and stable prices are not priorities despite what the Fed says publicly.
Look no further than the U.S. Dollar for an example as to how excessive money printing has permanently damaged American purchasing power. The value of the U.S. Dollar has depreciated over time (below chart). We have only the Fed to thank for devaluing the Dollar. Former President Richard Nixon is also to blame as it was his Administration that took the U.S. off of the Gold Standard in August, 1971.
We expect the fiscal deficit and Government debt expansion to outpace Real GDP growth until the value of the Dollar is zero given the Government’s addiction to spending and money printing. We expect the Fed to revise its target CPI meaningfully upward from 2% later this year or early next year.