With the Biden administration already setting the narrative yesterday that today’s inflation print could be ‘high’, and expectations for a headline print of +7.9% YoY (from +7.5% YoY in January), the bar was high for any surprises and the headline print came in right in the dot at +7.9% YoY – the highest since Jan 1982. See the chart below and learn more here.
Most importantly, real wages (average hourly earnings) dropped -2.6% on a YoY basis for the 11th straight month.
So in a sense, the net loss for the average worker would be 7.9% + 2.6% = a net 10.5% YoY loss in purchasing power.
The monetarist theory (also referred to as “monetarism“) is a fundamental macroeconomic theory that focuses on the importance of the money supply as a key economic force. Subscribers to the theory believe that money supply is a primary determinant of price levels and inflation.
This is a theory this author largely agrees with. This brings us to a basic formula for the value of a fiat currency.
Money Value = GDP / Monetary Base
An actual full data set is hard to come by but we can use certain broad indicators to give us an indication of where today’s inflation rates might eventually go. The inflation rate is the change in the value of Money Value in the above formula. We will use the change in M2 as a proxy (which may not be the best) for the change in the Monetary Base.
Looking at the chart below (see source), we can examine the last hyperinflation period of the 1970s and today’s, to get the potential inflation rate we may see going forward.
In the above chart in the 1970s, we can see that Money Supply Growth tended to equal the inflation rate. Of course, the rates would fluctuate from month to month.
These numbers would have to be adjusted by the GDP growth (which could explain other variances during times of lesser inflation), though when the numbers get this big, it becomes less significant.
For sure there are other variables that can affect this as well, so this is a very rough estimate for us mere people on main street.
With the current rate of Money Supply growth at +25% (using even broader Money Supply figures [see here] this could be even higher), we may see similar rates of inflation of +25% as well in the next few months. Of course, this assumes our government doesn’t do even more currency debasement with even more problematic policies. On the other hand, it does depend on how transient this Money Supply growth will be.
What could go wrong?
See more Chart of the Day posts.