In today’s world, many countries are coming out of the pandemic with record-high inflation that people haven’t seen in decades. This website will attempt to visualize inflation and the cause and effect relationships behind inflation.
measures the price change of a basket of consumer goods picked by the US Bureau of Labor Statistics. It is a index often used to represent inflation.
Food and Energy are some times separated out because of their volatility
“…inflation is equal to the change in the amount of money and credit spent on goods and services divided by the change in the quantities of goods and services sold.”
- Ray Dalio
So, the simple explanation is that the “easy money” that the governments give out during the pandemic suddenly rushes into products and services after the pandemic and overwhelmed the market, thus causing an inflationary imbalance in the markets. This is why nowadays many people criticize the central banks for keeping the interest rates low for too long and the government spending too much.
Consumer Price Index (CPI)
measures the price change of a basket of goods picked by the US Bureau of Labor Statistics.Food and Energy are some times seperated out becauee of their volatility
M2 Money Supply
The M2 Money Supply is used to measure the US money stock, which includes M1 (Cash, Checks, etc) plus savings deposits , small time deposits under $100,000, and shares in retail money market mutual funds.
Interest rates have a strong positive correlation with inflation. This is because when interest rates are high, people are discouraged to borrow money to buy things. This also means interest rates have a negative correlation with the M2 money supply. This makes interest rates the perfect tool to control inflation for decision-makers because making people spend less will decrease M2 and in the future decrease inflation. This correlation is very visible during the 70s too.
(in this chart the interest rate is represented by the Federal Funds Rate)
Quantitative Easing (QE)
However, after 2008 and 2020 interest rates reached 0% and below the inflation rate. This means that the real interest rate is actually below 0 and lost its power to stimulate the economy, at these times the Federal Reserve (US central bank) started quantitive easing (QE: basically print money), thus increasing the M2 money supply to support the economy.
The Bretton Woods Monetary System
The Bretton Woods system required countries to guarantee convertibility of their currencies into U.S. dollars to within 1% of fixed parity rates, with the dollar convertible to gold bullion for foreign governments and central banks at US$35 per troy ounce of fine gold (or 0.88867 gram fine gold per dollar).
This chart shows the price change in Housing (MSPUS), Food (CPIUFDNS) and Gas (GASREGCOVW) from 1990 to 2023. These are the three important parts of people’s everyday spending, and a good reflection of the average person’s cost of living.
MSPUS: Median Sales Price of Houses Sold for the United States, Dollars, Quarterly, Not Seasonally Adjusted
CPIUFDNS: Consumer Price Index for All Urban Consumers: Food in U.S. City Average, Index 1982-1984=100, Monthly, Not Seasonally Adjusted
GASREGCOVW: US Regular Conventional Gas Price, Dollars per Gallon, Weekly, Not Seasonally Adjusted