[Update] When Will Inflation End?

When Will Inflation End?

The next consumer price index (CPI) is set to be released on Thursday.

It’s going to be pivotal in the short run.

There are basically two directions: 

1. The report shows declining prices, the Fed will continue to slow its rate hikes, and the rally can hold. 

2. The report shows prices continue to rise, the Fed may be forced to keep the same rate hike trajectory that wrecked stocks, and the next correction is here. 

The probability of fireworks is high. 

For long-term investors, the report is a blip of noise that is distracting from the real future of inflation. 

Inflation Is Arleady Winding Down

The real driver of inflation isn’t tracked monthly.

Short-term shortages and supply disruptions can send prices soaring (e.g. eggs). 

Long-term, the driver of inflation is more money going to the same amount of fewer goods and services. 

Goods and services are fairly static, growing 2% or 3% per yaer. 

So the most important variable is the amount of money. 

To determine that we go to the latest reading of the Federal Reserve’s M2 Money Supply. 

This is basically a measure of total cash, checking deposits, CDs, and other things that are basically cash or can be turned into it.

It’s the best measure of total money out there.

This is the chart of the M2 Money supply over the last decade:






You can see the spike that started during the aggressive government spending response to the pandemic. 

That’s when the foundation for the current inflation in prices was laid. 

Looking at this number we can get a great idea of when inflation will end. 

That’s because we know that M2 money supply increased 38% from $15.5 trillion to $21.4 trillion today.

As a result, prices, on average, should increase 38%. 

The inflation in prices won’t be spread evenly. Essential items like food and used cars are experiencing it much more because of the base level of demand. But it will all average out to about 38%. 

After all, if there’s the same amount of stuff and 38% more dollars chasing it, prices will go up 38%.

Are we at that point?

It sure feels like if we’re not there, it should be soon. 

Just like it took about a year and a half to really start driving up prices, it will take some time to slow down the rate of price increases. 

That’s why it’s important not to hang so much on the current monthly inflation data. 

The monthly number has been and will be extremely volatile. 

Prices are going up 38% from 2020 levels and then the high inflation period will have wound down.

The flattening of the M2 growth will just bring the end of the inflationary period a bit quicker.