Jerome Powell, chairman of the Board of Governors of the Federal Reserve System (FRS), today testified before the U.S. Senate banking and finance committee on the state of the FRS’ monetary policy. One of the main points of questioning by the senators was the issue of inflation.
Republicans have been asserting that loose monetary policy, specifically the FRS’s delay in raising the federal funds rate, and expansion of its balance sheet of agency and mortgage-backed securities, combined with the Biden Administration’s spending are at the heart of U.S. inflation.
Democrats’ main assertion is that companies have been taking advantage of the American consumer by increasing prices and taking profits.
We understand that in a political environment each side of the aisle aims to tug at enough electorate heart strings in order to secure votes in the fall. I don’t pretend to be a statistician, but a back of the napkin analysis of growth in the money supply and changes in the consumer price index tells me that Republicans should include other factors in their cause of inflation analysis, and that Democrats need to trust Americans more by sharing and explaining the numbers.
According to data from the FRS, between January 2021 and April 2021 M2 money supply increased an average of 1.3%, month-over-month while inflation increased an average of 0.5% month-over-month during that same time period.
But between January 2022 and April 2022, while M2 money supply increased an average of .003% month over month, inflation increased 0.7% month over month. The money supply was at a dead crawl while consumers continued to see price increases at a faster rate versus the same period last year.
I admit the sample is small. I am trying to be fair to the Biden administration by reconciling his time in office with available 2022 FRS data on money supply. Hopefully my small exercise demonstrates that there is some room for the Democrats to strengthen their arguments on the cause of inflation and that pricing behavior on the part of firms needs to be taken into consideration.
22 June 2022
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