There is considerable talk about inflation these days, since gasoline prices are hitting historic highs and the Federal Reserve has been increasing the money supply at a very rapid rate. And yet, if we actually take the time to look at a range of data, one thing becomes very clear: the increase in prices simply hasn’t kept pace with the increase in either of the primary measures of the monetary stock.
Annual delta, February 2011 to February 2012
M1: +341.8 billion, +18.2 percent
M2: +882.3 billion, +9.9 percent
US avg gas price: +22 cents, +6 percent
National median home price: +0.3 percent
CPI-U: +2.9 percent
This gap in relative deltas cannot be explained without bringing the credit markets into the equation. And it should be fairly obvious, if not tautological, that an increase in debt is inflationary whereas a decrease in debt is deflationary, as per the law of supply and demand. So why are we still seeing some price inflation despite the contraction in the private debt sectors?
The answer is simple. The rapid 23 percent annual expansion in public debt has allowed the economy’s overall debt level to remain essentially flat for the last four years. In other words, despite all of the foreclosures and defaults, there has been no debt contraction and therefore no deflation… yet. Even so, the only place that the Fed’s herculean attempt to raise price levels by printing, borrowing, and spending money has really been effective is in the stock market, or more precisely, in Apple stock.