Over the past year, the U.S. money supply has increased significantly, as is shown by the growth in the money supply measurement known as “M2.”
M2 includes cash, checking, savings, money market accounts, and other time deposits. According to the St. Louis Fed, the M2 has increased from about $15.5 trillion to $19.4 trillion from mid-February 2020 to the same point in 2021, an astonishing $4 trillion.
“That’s a one-year increase of 26%—the largest annual percentage increase since 1943.” – Wall Street Journal
Many agree that this swift expansion of money and credit is feeding asset price growth (stocks, bitcoin, commodities, and real estate).
What is less clear is if or when this will result in inflation in the consumer price index (CPI) which measures change overtime in the prices paid by consumers for a basket of consumer goods and services.
Bond markets and economic trends as of today seem to be foreshadowing future inflation at the CPI level, and yields are rising in response. Interest rates seem almost certain to rise from here, but humility is in order, especially in times such as these.
“COVID-19 caused many businesses to pull back on investments as shutdowns curbed sales and those that experienced surges were uncertain about the shape and size of post-pandemic demand,” – Market Watch
Many store fronts also closed down and businesses laid off their employees causing a rise in unemployment. According to Market Watch, the Fed has already indicated that it will tolerate inflation above 2% to push unemployment down to an acceptable level. Political pressures to curb inflation may also soon become an issue for President Biden, but only time will tell.
Contact Norman Yoder or any member of the Brown Edwards team to discuss options for you and your business in the current economic environment.
Norman Yoder is an assurance partner with Brown Edwards certified public accountant. Among his areas of expertise, he specializes in Financial Institutions and US public companies and is subject to PCAOB standards.