Inflation Woes - It Ain't Rocket Science

US CPI inflation for June was reported yesterday, came in at an "unexpected" 9.1% - a 41 year high.  Made me nostalgic to be honest, I was still a grad student back in 1981 :)

But.. why is inflation so high?  With energy, food, housing and transport prices soaring as much as 30-40%, surely there must be some demand destruction going on?  Yes, there is - but not as much as necessary, and certainly not very fast.  Why?

Because...

1. People will rather spend their money than save it.  Inflation is at 9.1 % and 3 month Treasury bills are at 1%.  Do the math, it pays to consume! (see chart below). 

CPI Inflation (red line) And 3-Month Treasury Bills (blue line)

Right now real interest rates in the US are at a record negative 8.1% (see chart below). That's a very strong dis-incentive to save your money.  If anything, the Fed is urging you: "stock up on heating oil, gas, food and everything else that is non-perishable" ... and thus drive up prices through extra demand.

Real Interest Rates At Record Negative 7.5%

2.  Is there money to spend instead of save and thus keep stoking inflation?  Of course there is - because the Fed is really, really dragging its feet on removing the ocean of liquidity it created during the pandemic.  Looking at the chart below, the annual percent change in M3 money supply has to go negative before liquidity is reduced. Unfortunately, M3 is still rising at 7.5-8% annually.

Annual Percent Change In M3 Money Supply

Loud message to the Fed - and even louder to the ECB: sharply raise interest rates to promote saving instead of chasing higher priced goods/services, and sharply reduce money supply so there is less money to spend in said chasing.

It ain't rocket science!!