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# Does a growth in M2 cause or imply an increase in inflation?

We've recently seen a growth in M2 in the USA. Should we expect a growth in M2 to lead to an increase in inflation?

M2 and CPI data can be obtained from St Louis Fed:

research.stlouisfed.org/fred2/graph/?id=M2

research.stlouisfed.org/fred2/series/CPI...

Here is a plot of growth in M2 and seasonally adjusted CPI

Taking data back to the start of the M2 series in 1980 the equation of line of best fit is 3.14488 - 0.00672425 x and the data has an R squared of 0.000152817.

For the USA there is no link whatsoever between M2 growth and CPI over the entire period of M2 data being published.

Interestingly, visually the FRED chart looks to be showing an inverse correlation between the CPI and M2 growth from about 1996/97 through to 2010. Rises in M2 growth seem to coincide with falls in the CPI. That (negative correlation) is indeed the case, though weak, as the plot of data from that period shows:

What of the possibility that inflation lags M2 growth? In other words isn't it reasonable to expect that as M2 growth increases the "surge" in inflation would be observed at some point later on rather than being coincident to the M2 growth?

In the next plot I take a lag from zero to 120 months and measure the correlation (blue line slope, purple line r squared). We can see that a weak positive correlation begins to exist from a period of 45 months through to 90 months. Could we attribute causation to a correlation with such a long lag? Beats me, but I would have thought it was doubtful.

I've also made plots of 12, 18, 24, 36, 48, 60, and 90 month rolling correlations. Here are a couple of samples:

It seems to me that no case can be made that growth in M2 is likely to lead to an increase the CPI. On the contrary the data suggests if anything the reverse is more likely to be observed. Myth busted.

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Post script: it was put to me that it is not surprising that I am not seeing a relationship between M2 growth and the CPI because I am using headline CPI. So without further ado here are the charts using CPI ex food & energy.

M2 growth and inflation? Nothing to see here. Move along.