Inflation and Money
One consistent theme that is being seen in every report I read, other than what the OECD data shows, is that prices are rising across industries on almost all raw materials. I know for me it is very true in my personal life. For example, my home insurance renewal invoice arrived this month. The annual premium was 16.4% higher than last year. I did not change the policy or file any claims, it was simply a pure price increase. In other areas of my home life, I see property taxes, broadband services, varied subscription based services, and food all rising more than 5% year-over-year. Inflation is alive and well. A single slice of pizza cost me $3.50 last week. New home prices are now greater than they were in 2007. With rising prices evident and more anticipated, I must ask, where is the income growth to meet the rising expense growth? From my vantage point, U.S. household incomes have just recovered to the level that existed in the year 2000. Leverage and Central Bank Quantitative easing have fueled price increases, but the flow-through to incomes is generally lagging, and with the CBs reducing their monetary accommodation, a large and unknown outcome exists, which is what happens when the historic monetary stimulus is no longer there as a support after trillions of dollars have been pumped into the world economies. Present expectations for the Federal Reserve tightening are focusing on a reduction of reinvestment in debt assets over the next twelve months to the tune of $300 billion; split $180 billion in treasury securities and $120 billion in Mortgage Backed Securities.
Continuing with the comments on the Fed, a look at the money supply growth and the velocity of money show tightening that the market has ignored. Consider the downward trajectory of M2 money supply growth over time and the recent inability to break above 2% growth for the past 52 weeks as measured in quarterly change: