There's a colloquial definition of inflation which reads, “too many dollars chasing too few goods.”
I think this describes the cause inflation well and hints at the relationship between supply-side and demand-side inflationary pressures. Eg, whenever the dollar / goods ratio increases you should expect inflation to increase.
Given this, my understanding of inflation isn't compatible with a world of durably high inflation in which supply-side inflationary pressures remain flat or decrease, while M2 growth is flat to negative. Yet this is exactly the situation we seem to in today with supply-side pressures easing, while M2 is slightly down on the year.
Of course, this comes after a huge increase in M2 which likely needs time to work it's way through the system (those dollars don't all get spent at once), but should this trend in M2 continue would it even be theoretically possible for inflationary pressures to remain high without further supply-side disruptions – or is my understanding of inflation incorrect?
I know Jeremy Siegel has cited M2 being flat as a reason to believe the Fed might be getting too aggressive, but I'd interested in hearing what you guys think.
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