Will the Coronavirus stimulus create inflation?

The federal government is pumping a lot of money into the economy. A lot. Just today (Apr 9), they announced another $2.3 trillion to lend to states, cities, and midsize businesses. These are truly unprecedented levels of capital injection.

So that got me curious, will all the money create inflation?

So I pulled data on the Consumer Price Index. CPI is a basket of goods and services (e.g. food, housing costs, transportation expenses, apparel, etc.) that’s commonly used for measuring inflation.

Then I pulled M2. M2 is a fairly broad measure of money supply. It includes “near money” like cash, checking accounts, etc. and broader measures like savings accounts, money market securities, mutual funds, etc.

Here’s what the data looks like plotted over a 20 year period:

This graph is not particularly useful. Sure, there’s a 0.97 correlation, but there’s not much say about the predictive power of M2 on CPI. It’s hard to suss out any true trends.

So let’s look at the year-over-year change on a monthly basis to see if we can better spot some trends.

Now we’re cooking! You can start to see a pattern.

However, as it stands now, there’s an inverse correlation of -0.10. So in other words, an increase in the monetary supply is correlated with a decrease in inflation. That doesn’t make sense — more money floating around would obviously increase inflation.

So if we hypothesize that an increase in monetary supply takes a while to propagate and will manifest in CPI in 6 months, we get a graph like this:

Here, we have 0.29 correlation (though there are some periods of inversion). That’s mostly aligned with common sense.

While it’s only a correlation (and not necessarily causation) and we’ve certainly manipulated the data to align with our hypothesis, it does lend at least some credence to monetary supply having a moderate affect on inflation.

But to return to our original question — How will the unprecedented levels of federal stimulus impact inflation?

It’s hard to say. Massive monetary stimulus will exert a tremendous amount of inflationary pressure, but recessions exert a ton of deflationary pressure (as you can see in the big dip during the 2008–2009 financial crisis).

For now, I’ll leave you with this meme: