Recent Trends in M2 Money Supply and CPI
In December, the M2 money supply reached a notable figure of $21.5 trillion, coming very close to its all-time peak. The M2 money supply serves as a comprehensive measure of the total volume of money circulating within an economy, encompassing both highly liquid assets and those that are less liquid.
Concurrently, the Consumer Price Index (CPI) plays a crucial role in tracking the average price fluctuations of goods and services over time, providing valuable insights into inflation trends. The ongoing expansion of the M2 money supply is generally viewed as a positive signal for risk assets, as it suggests that additional liquidity is flowing into the financial system. This influx of money typically finds its way into riskier investments first.
Notably, the M2 money supply has recorded a new monthly high consistently since January 2024. The interplay between the M2 money supply and the CPI is significant, as fluctuations in the money supply can directly influence inflation trends. Despite the Federal Reserve’s active measures to tighten monetary policy through quantitative easing and maintaining elevated Fed funds rates, their primary goal remains to reduce CPI and steer inflation back toward the 2% target. However, the persistent growth in the M2 money supply continues to pose challenges in achieving this objective.
