Monday, March 7, 2011

Monetary base expansion and inflation

Here is something to keep an eye on: . The monetary base is exploding.

2008-01-02 847.948
2008-09-10 874.796
2008-12-31 1690.796
2009-12-30 1994.399
2010-12-29 1982.741
2011-02-23 2275.053

Monetary base is basically made up of 3 components: currency in circulation, demand deposits, and reserves at the central bank. If you define inflation as expansion of the money supply, then this is as pure as it gets. The alternative definition of inflation is the price you pay at the store, i.e. the consumer price index, CPI. To make this clear, I will call the first "money supply inflation" and the second "consumer price inflation". There is a correlation between the two although it may be a delayed reaction. Anyways it is the first that I am concerned about.

Thus far, the money supply has inflated an average of 7% per month! CPI is increasing only about 1.5% per year. Anyways, this is worth keeping an eye on to see if it keeps rapidly increasing.

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