US M2 Money Supply Surges to Fastest Growth Rate in Three Years

The M2 money supply in the US has grown at its fastest pace in three years, reaching 5.4% year-over-year growth in July. This has raised concerns about inflation, which currently sits at 3.4%. The M2 money supply includes money in circulation, checking and savings accounts, time deposits of less than $100,000, and money market funds.

Economists view the M2 money supply as a leading indicator of inflation because it represents the amount of money circulating in the system. If there's more money available to spend, demand increases, driving prices up. The relationship between M2 and inflation is complex, however, and some economists argue that other factors also influence inflation.

Former Fed Chair Jerome Powell has stated that the classic relationship between M2 and inflation no longer holds, while current Fed Chair Kevin Warsh views the M2 money supply as a way to measure the stock of money. He believes that if the Fed had paid closer attention to M2 during the pandemic, it might have seen the high inflation coming.

The recent acceleration in M2 growth could be due to several factors, including the Federal Reserve's decision to end quantitative tightening and restart reserve management purchases (RMPs). This has effectively pumped money into the economy. Additionally, asset prices have increased significantly in recent years, which may also contribute to the growth in M2.