There were two inflation readings released this week (CPI and PPI) that threw cold water on the idea the inflation fight is all but over and that the Fed would soon be lowering interest rates. In response, bond yields spiked and stocks retreated for the first time in five weeks. Below is a graph of the CPI with the latest release on the far right. It has been eight months since inflation declined meaningfully. CPI has been flat for eight straight months (see chart immediately below). The trillion dollar question is WHY?

We at WealthPlan think the root cause of the stall in inflation’s decline is money growth. Since May of 2023, the M2 money supply has been flat and the most recent reading in January is up! (See the red circle below.) In May of 2023, the total M2 money supply was 20 trillion 653 billion dollars. On January 1, 2024, that reading was 20 trillion 959 billion dollars, and increase of 306 billion dollars.

Consider the famous quote of Nobel Laureat and University of Chicago economics professor Milton Friedman on the subject of inflation he made in 1970:

Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.

It may be the case that money supply needs to shrink even more than it has to put the final nail in the inflation coffin. The only way to do this is for the Fed to continue to pursue policies that destroy money through the joint efforts of interest rate policies (higher for longer) and balance sheet reductions (reducing assets held thereby sucking money out of circulation). Both include the potential for difficult economic outcomes. We wrote a piece in May of 2022 entitled “Money Heaven” examining this process of money destruction in detail. A corrollary of destroying money is real economic demage in the form asset price declines and increasing unemplyment, both of which will be painful. To achieve its 2% inflation objective, the most difficult policy decisions may still be ahead off the Fed. It would appear their hope is to slow play these moves in order to orchestrate the soft landing and drag this inflation reduction stall for many more months. But it might not work. If not, then the tough choice might be between higher inflation than they would like or real economic pain from here.  Only time will tell what the Fed will choose.

As always, we at WealthPlan take a long-term view, knowing this uncertainty will someday pass. In the meantime, we continue to monitor the market landscape and our investments with an eye toward total portfolio solutions and a long-term focus as a prudent way of managing assets in the face of such uncertainty.