June 3, 2021


When banks lend to consumers and businesses, they put the proceeds into a checking account.  At that point the money supply begins to grow.

In April M-2 grew at an 11.8% annual rate.  In the past year it has grown at a dramatic 18.0% annual rate. That growth rate was fueled by $3.0 trillion of purchases of U.S. Treasury securities in March and April of last year as the Federal Reserve flooded the banking system with reserves in an effort to lift the economy out of the deepest recession in our history.

Those are funds that businesses can use to pay their workers, pay the rent, and keep the lights on, or that consumer can use to pay their rent or mortgage, their car loan, or buy food.

Growth of that magnitude in the money supply will almost inevitably lead to a pickup in the rate of inflation.  The problem is that while we may know inflation is going to accelerate, the lag in timing between a pickup in money growth and the eventual increase in the rate of inflation is long and variable.  Having said that, April saw a big, unexpected jump in consumer prices.  Commodity prices are rising rapidly.  And labor costs are picking up as employers are willing to pay up to get the workers they need.  The pickup in inflation appears to have begun.

Stephen Slifer


Charleston, SC