Inflation is always an important topic. As someone who follows this very important discussion with interest, I enjoy reading the opinions of my economist brethren, as they ruminate on inflation’s demise or its imminent return.
This morning, after reading a short article on the recent return of “monetary velocity,” I decided to do a bit of research on the topic and see if I agreed with the author’s conclusion that the rate of inflation seems to be ticking up.
The author focused on two primary data points: The recent acceleration in “average hourly earnings” and the sizable increases in a US “measure of money” known as M2. Both, this author felt, indicated a near term return of a higher inflation rate. Others, too, have recently opined that a return of “wage inflation” might kick up the CPI (or the inflation index preferred by the FED, the PCE.)
Let’s take a closer look.
The US Bureau of Labor Statistics is a great source for data. They track things like employment, compensation, productivity, changes in the CPI, etc. They do a great job. I settled in on a release called “Employment, Hours, and Earnings from the Current Employment Statistics survey (National)”. Table B-8 shows movement of the “AVERAGE HOURLY EARNINGS OF PRODUCTION AND NONSUPERVISORY EMPLOYEES” between 2006 and 2016. Sounds on point, right?
Downloading the table into excel, after a bit of math, I found that average hourly earnings increased by only 2.6% in 2015, following an increase of only 1.87% in 2015. Here’s a more complete list of the annual percentage “average hourly earnings” increases since 2007:
Well, I don’t see any inflation here. Frankly, quite the opposite. The currently low unemployment national rate does play into this discussion, but I’ll save that for another day.
How about the growth of M2 – a good measure of US money supply? Is money supply growth accelerating, suggesting as the amount of money in the economy grows so will the rate of inflation? Are the two highly correlated?
Lets take a look.
I looked at the change in CPI and the change in M2 from January 2003 to December of 2015. During this period, M2 increased by 77%. The CPI, however, increased only about 26% – about 1/3 of the M2 increase. An average annual increase of about 2%.
Clearly, growth in money supply – alone – has little to do with CPI growth today. Other factors must be at work.
Has M2 growth accelerated recently? Is this cause for future concern? Nope. Here are the annual M2 percentage increases since 2003:
It looks to me like M2 growth has been pretty consistent. It’s averaged about 6% each year. As we can see, last year, M2 grew slower than the average.
The seeds of future inflation may be out there…but I have yet to see any “green chutes” popping up.
If, after three rounds of quantitative easing (money printing IMHO), six years of near zero rates at the Fed discount window and a longer period of M2 rising at twice wage rate growth it’s hard to see how M2 is a predictor of anything. As long as structural unemployment remains at record post Depression highs it’s hard see how wage growth can really accelerate. The Keynesians seem to have used every arrow in their quiver with little to show. Maybe it’s time for constructive dialog on what actually works to get the economy moving rather than doubling down on ‘democratic socialism’.
Well. There you go. Anyone else want to chime in?