Grywacheski

The classic definition of inflation is the percentage increase in consumer prices over the past 12 months. But inflation can also be defined as "too much money chasing too few goods." From February 2020 to April 2022, the nation's M2 money supply surged by more than 40% to a record-high $21.7 trillion.

The M2 is a classification used by the Federal Reserve to measure the total value of U.S. currency within the economy at any given point in time. The M2 is defined as the total amount of currency in circulation plus any money held in checking and savings accounts, CD's and money-market accounts. It is a broader measure of our money supply and is frequently used as an indicator of future inflation.

Increasing the M2 money supply by 40% adds a lot of money to our economy. And what do consumers, businesses and local governments do with that extra $6 trillion? They spend it. And all that added spending creates tremendous upward pressure on prices.

From its record-high level of $21.7 trillion in April 2022, the M2 money supply gradually fell by $1.1 trillion, or 5%, by October 2023. Since then, however, the M2 has been steadily rising over the past 16 months. Currently, the M2 stands at $21.5 trillion, just $200 billion shy of its April 2022 all-time high. This means there's still 39% more money floating around the U.S. economy than its pre-pandemic level in February 2020. Thus, it's of little surprise that inflation has remained stubbornly high and has actually started to rise again over the past few months.

Understandably, the rationale behind the initial surge in our nation's money supply was to combat the economic toll caused by the pandemic. But that was nearly four years ago. Moreover, it appears there's been little appetite to address this issue. As I've said before, flooding the economy with $6 trillion in cash with the stroke of a pen has consequences. And one of those consequences is high inflation.

Mark Grywacheski is an expert in financial markets and economic analysis and is an investment adviser with Quad-Cities Investment Group, davenport.

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