Inflation continues to be an issue for the Federal Reserve, so much so that the Federal Open Market Committee (FOMC) just raised the federal funds rate for the first time in three years. In August, inflation clocked in 3.4% higher year over year on a seasonally adjusted basis, according to the Consumer Price Index (CPI). Excluding more volatile food and energy prices, core CPI rose 2.4%.
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"Act 2" is the global rollout. Continue » That's not where the Fed would like it, but it's a far cry from when the CPI surpassed 9% in 2022, marking the highest inflation in 40 years. While inflation has made progress, it has not shown clear progress toward the Fed's 2% target this year.
M2 money supply grew at the fastest level seen in three years. It could be an ominous sign for inflation. There are M1 and M2 money supplies.
M1 is cash in circulation and money that can very easily be converted to cash, such as funds in a checking or savings account. M2 money supply is M1 plus time deposits of less than $100,000 and money market funds, so now we're talking about funds in banks earning higher interest rates, driven by prevailing market rates. Some economists view the money supply as a leading indicator of inflation because if there's more money circulating in the system, there's more money available to be spent, driving demand and, therefore, prices.
As you can see in the chart, the money supply has expanded tremendously since the turn of the century. This has been driven by economic growth, quantitative easing by the Federal Reserve during financial crises, low interest rates, and deficit spending by the U.S. government. In July of this year, the most recent month for which data is available, the M2 money supply grew roughly 5.4% year over year.
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