We gave our two oldest children their first piggy bank this year. The piggy bank has a compartment to give, save, and spend. We also created a chore chart for them and “pay day” is every Sunday. Our goal is to teach them that they should not spend all the money that they “make.” Our oldest (Hallie) has fully bought into this idea and said “Daddy – we need to get money into the piggy bank faster.” Without knowing it, Hallie was asking us to increase her M2 money supply!
What is the M2 money supply? This is just a fancy term economists use to describe the sum of all the money in the financial system. We have written a handful of times that the measure of the M2 money supply is one of the best tools to help us understand whether inflation is actually moving higher or lower.
Last week, the Federal Reserve released May data and reported the M2 money in circulation rose just 0.1% in May (after falling in April). This represents the slowest growth rate since the pre-pandemic days of 2019. From a historical perspective, we consider an annual 6% increase as "normal" growth.
M2 Money Supply – Last 12 Months
Glass Half Full… As you can see above, the M2 money supply has had limited growth over the past 4–5 months which is good news for future inflation expectations.
Glass Half Empty… In April, the U.S. Treasury posted the largest monthly surplus on record from unusually large income tax payments. This caused April's M2 money supply figure to show a rare decline. Some economists have suggested that this has affected the M2 money supply in May as well.
Moving Forward
One way to slow down the growth rate of M2 money supply is by slowing the amount of new loans that banks make to companies. In theory, higher interest rates will slowly reduce the demand for companies to borrow money from the banks.
Key question… will rising interest rates tip the U.S. into a recession? Time will tell.
We will continue to monitor the M2 money supply but the last two months of data are encouraging and support the idea that inflation could be peaking.
About the Author
Matt Price serves as a Partner and Director for The Price Group of Steward Partners. He resides in Houston with his wife, Emily, their three children and "Fisher" the family golden retriever. Matt studied at the University of Pennsylvania – Wharton School of Business for his Certified Investment Management Analyst (CIMA®) designation after receiving his undergraduate degree from the University of Tennessee - Knoxville. Over the past 11 years, Matt has helped families make high quality, common sense decisions regarding their wealth and their legacy. Matt firmly believes everyone needs a wealth coach!
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