What Must Lie Beyond The M’s

Year-over-year, the headline complete CPI bumped up to 1.68% broad consumer price inflation during February 2021. That’s up from 1.40% in January as annual comparisons in the energy parts of the bucket turned positive for the first time since last February. CPI energy gained nearly 2% year-over-year last month, from -4.0% the previous month, as the gasoline (motor fuel) index was 0.7% higher compared to -8.5%.

Despite these outsized contributions from oil and energy, just the 1.68% topline – even after nine months of +20% M2.

The primary reason was that the core CPI rate in February sank to just 1.28% year-over-year, the smallest since last June and one of the lowest rates on record. In the services sector, stripping out rent prices, this other “core” rate improved (1.23%) from January’s just about lowest on record (1st percentile) to merely near the lowest on record (3rd percentile).

Outside of crude and other commodities, only a conspicuous absence of inflationary pressures (see also: rent).

What must be missing from the M2 focus?

The answer to that question began to be pieced together a very, very long time ago. I’ve referred to the period of the late sixties and early seventies on many, many occasions over the years because that’s when monetary evolution first began to cause enough trouble even for central bankers and Economists – beyond that whole Great Inflation thing they didn’t understand.

It had taken them more than a decade to finally start taking drastic money and banking changes seriously, as any number of official or academic discussions had illustrated at the time. The one I use most often gets right to the heart of this current M2 issue; all the way back in 1974, Charlie Coombs, the Fed’s Open Market System manager (back when the system manager actually had to be both a banker and a competent one) realized the funny business wasn’t being limited to fun outside the US boundary:

In reply, Mr. Coombs said an effort could be made to develop such a measure, but he doubted that it would be successful. The volume of funds which might be shifted back and forth between the of the monetary statistics arose in connection with Euro-dollars; he suspected that at least some part of the Euro-dollar-based money supply should be included in the U.S. money supply. More generally, he thought M1 was becoming increasingly obsolete as a monetary indicator. The Committee should be focusing more on M2, and it should be moving toward some new version of M3… [emphasis added]

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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