What Is The Best Measure Of Monetary Inflation?

Let's discuss M1, M2, Base Money, and QE as measures of money.

Money Supply Measures 2021-05

Monetary Definitions

M1: M1 consists of (1) currency outside the U.S. Treasury, Federal Reserve Banks, and the vaults of depository institutions; (2) demand deposits at commercial banks (excluding those amounts held by depository institutions, the U.S. government, and foreign banks and official institutions) less cash items in the process of collection and Federal Reserve float; and (3) other liquid deposits, consisting of OCDs and savings deposits (including money market deposit accounts) - Revised May 2020

M2: M2 consists of M1 plus (1) small-denomination time deposits (time deposits in amounts of less than $100,000) less IRA and Keogh balances at depository institutions; and (2) balances in retail MMFs less IRA and Keogh balances at MMFs. - Revised May 2020

Base Money: The monetary base is the sum of currency in circulation and reserve balances (deposits held by banks and other depository institutions in their accounts at the Federal Reserve).

What Is Inflation?

If inflation is an increase in money supply, then which money supply?

Money Supply Measures Percent Change

Money Supply Measures Percent Change 2021-05

Money Supply Measures Percent Change Detail

Money Supply Measures Percent Change Detail 2021-05

If you believe an increase in M1 is the measure of an increase in inflation, then year-over-year inflation hit 357% in February of 2021.

Let's exclude M1 and see what we get.

M2 and Base Money Percent Change

M2 and Base Money Percent Change 2021-05

If inflation is measured by Base Money then most of 2015-2020 was a period of deflation before soaring to 58.71% in May of 2020.

If inflation is measured by M2, the year-over-year increase was 1.61% in 2010, then hovered between 3% and 6% for lengthy period before surging to 27.1% in February of 2021.

M2 Money Supply vs the CPI

M2 and CPI Percent Change

The above chart suggests there is no relationship at all between consumer prices and money supply.

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