I’ve been hearing that there’s inflation coming, the claims sometimes modified with “and a lot of it,” and I’m curious about that claim even though I wish wholeheartedly we didn’t have to talk about it as if it there’s some sort of imperative attached when the alternative to slightly higher inflation than the last decade is worse.

Please, do not take anything I am writing here as investment advice. I am not a professional and nothing I say here is intended to imply otherwise.

When I want to understand whether the inflation warnings I’ve been hearing have anything in common with reality, I hop on FRED and look at some common monetary indicators to plug into MV=PY. The ones I pick may or may not be the best ones to choose for professional work. I’m not a professional economist and I am doing this for my own interest, so I pick the closest related figures available for a sort of back-of-envelope guess. It’s like putting lipstick on without a mirror, which is doable – just not perfectly precise.

Of course, one cannot just plug numbers into MV=PY and come up with a crystal ball either; you must know where you’re coming from to figure out where this might be going, at least if it’s related to monetary issues.

For the M in the equation, I will be using M2. Yes, M3 is better because it includes things like substitutes. But, M2 has a velocity data point available on FRED that I will be using for the V, and if the kind of inflation I’ve heard about is coming, it will show up in M2 and M2 velocity. When I look at these two, M2 and M2 velocity juxtaposed, I am seeing fast growth starting in 1Q 20 in M2 like nothing since as far back as data is available, but I see a much steeper decline in velocity starting about the same time frame.

The relatively recent fast growth in M2, I presume, was to offset the decline in velocity in some attempt to keep PY (or NGDP) stable because whatever happens on one side of the equation comes out on the other. As the logic goes, if that fast growth in M2 had not happened at the same time velocity was hitting the skids, and velocity were left to free-fall, then PY would also have been in free fall – and that would have been very bad, like a double whammy depression, first from COVID and then nominal chaos of the deflationary kind.

At least in M2 velocity, there hasn’t been much of a recovery as of 1Q 21 while growth in M2 is slowing somewhat.

I have not looked at TIPS in a couple of weeks. It was the first thing I looked after hearing inflation rumors. When I did look at them, I didn’t see any huge inflation problem on the horizon. The highest spread was 2.89% on the 10-year. What I am seeing in the money stock agrees with TIPS markets.

So… I don’t see the next inflation apocalypse on the horizon, unless one considers somewhere near 3% PCE inflation somewhere down the road as an apocalypse (in which case one has more issues than I can help with). What I see in the numbers here is a competent Fed and an economically healthier alternative to obsessing about inflation. I wouldn’t want it any other way.

PS: It’s pretty darned hard to keep inflation stable during adverse events with a monetary framework that includes IoER and all the politics that comes with it, making it biased toward tight. The Powell Fed managed to do this. They deserve a huge THANK YOU because this COVID crisis could have been much worse economically, but wasn’t for all their efforts.

PPS: The people complaining about inflation either don’t understand or care about the alternative. There’s an opportunity cost to nearly everything, including whether a steep dive in velocity will be offset. There is no having the cake of not experiencing another deflationary spiral and eating it too without a little higher inflation for a time.