Money Supply M2 is a measure of the money supply that includes cash, checking deposits, and easily convertible near money.

The “M2 Money Supply” is a measure for the amount of currency in circulation. M2 includes M1 (physical cash and checkable deposits) as well as “less liquid money”, such as saving bank accounts.

M2 is an excellent measure of liquid money that is available to be spent. It is a much better measure of money demand than it is of money supply.

Money Supply M2 in the U.S. increased to $20,982.90 Billion in September from $20,797 Billion in August of 2021. Source: Federal Reserve

Many economists believe excessive monetary growth is a primary cause of recent high inflation. Behind the 35.7% monetary increase in M2 money supply lies $5.5 trillion of net fiscal spending power injected by the federal government. Milton Friedman famously said “inflation is always and everywhere a monetary phenomenon.” 

“Inflation is always and everywhere a monetary phenomenon.” Milton Friedman

Effectively, inflation can happen if the money supply grows faster than the economic output under otherwise normal economic circumstances. Inflation, or the rate at which the average price of goods or services increases over time, can also be affected by factors beyond the money supply, such as supply chain constraints and labor shortages.

According to the monetary theory of inflation, inflation occurs when the supply of money exceeds the demand for it; in other words, when the Fed supplies more money to the economy than the economy wants.

The Fed’s quantitative easing changes the form of the “money” (purchasing power) that deficits create, not the amount.

The consumer-price-index report reveals that big relative price shifts, notably for energy, food and vehicles, and base effects lie behind the rise in inflation.

Wages in the third quarter were up 4.2% from a year earlier, according to Wall Street Journal, the fastest increase since 1990 as labor shortages in a widening range of industries prompted employers to raise pay. Meanwhile, inflation has topped 5% for the past four months, the hottest in decades.

At first blush, this looks like the start of a process where wages push up prices, which then prompt employees to ask for, and receive, higher wages. That sort of wage-price spiral has historically been a key ingredient in persistently high inflation.

Wages and prices are often thought to have “an iron lockstep relationship and that’s just not the case here,” said Peter Matthews, economics professor at Middlebury College. While firms will attempt to pass on higher labor costs to customers, differences in how various sectors tend to respond will determine the impact on inflation, he said.

Prices have surged even more for factory goods, but those increases seem linked to key materials, energy and shipping rather than wages.

Decades ago widespread unionization and cost-of-living adjustments meant wages responded relatively quickly to higher inflation. Since then declining unionization, slower-to-adjust minimum wages and lower productivity growth have restrained wage growth except when unemployment is low. Even in the third quarter wage growth lagged behind inflation.

References:

1. https://www.longtermtrends.net/m2-money-supply-vs-inflation/
2. https://www.nasdaq.com/articles/confusing-connection-between-m2-and-inflation-2009-12-16
3. https://www.wsj.com/articles/wages-and-prices-are-up-but-it-isnt-a-spiralyet-11635688981