The Monetary Surge Continues to Ebb

We've told people to watch the M2 measure of money in order to understand whether inflation will cool down or heat up. The Fed only releases this data on a monthly basis. They used to release it weekly, and we think not doing so robs the world of important information, nonetheless for now it is monthly.

Today the Fed released May data on the M2 money supply and from our point of view it was welcome news, signaling that the monetary surge propelling US inflation numbers to a four-decade high seems to be slowing. The amount of M2 money in circulation rose just 0.1% in May (after falling in April).

As a result, the 12-month change fell to 6.6%, the slowest growth rate since the pre-pandemic days of 2019. Six percent growth is what we would consider "normal" from a historical perspective, so this represents welcome progress. So far in 2022, the money supply has grown at a modest 3.1% annualized rate.

However, high inflation is likely to linger. The M2 measure of money grew at an 18% annualized rate in 2020-21, or roughly three times the "normal" rate, and it will take multiple years for the US economy to fully digest all that excess purchasing power even if the money supply slows in the year ahead. If the Fed really does want to achieve a soft landing for the US economy, the best option in our opinion is to somehow keep M2 growth at a below trend rate in the 2-4% range for the next few of years.