The money circulating in the U.S. is expanding rapidly, a warning sign that inflation may continue to surge higher.
The so-called M2 money supply includes currency, savings deposits, and retail money-market funds. Data released Tuesday afternoon showed the money supply rose to its highest level in over a year, and is up 0.8 percent compared with a year ago.
This is the first year-over-year increase in the money supply since it began shrinking following rate hikes in 2022. Following the latest increase, the money supply is now higher than at any time since March of last year.
M2 has expanded in three of the last six months and in four of the last five weeks.
The rise shows that the Fed’s battle against inflation has run out of steam. The consumer price index was up 3.47 percent in March compared with 12 months earlier , an acceleration from the 3.17 percent gain recorded in the prior month. That was the highest rate of inflation since September of last year.
Inflation generally follows M2’s path with a lag, although the timing of the lag is unknown and variable. The growth of M2 suggests that more inflation may be in store later this year or perhaps even next year. This could cause even further delays in the timing of a Fed rate cut or even push the Fed to raise rates, a development current market prices indicate is regarded on Wall Street as completely off-the-table.
M2 is currently 36 percent above where it was prepandemic but around four percent below its peak in April of 2022.