Expert Commentary

U.S. Disinflation = Asset Price Deflation

The U.S. economy does not have an inflation problem. Rather, it has disinflation.

Pedant: noun. A person who is excessively concerned with minor details and rules or with displaying academic learning.

The English language word pedant comes from the French pédant, or its older mid-15th century Italian source pedante, meaning 'teacher or schoolmaster'. I must admit to overwhelming pedantic feelings when it comes to the subject of inflation and deflation. You see, the entire world has been hoodwinked by central banks into believing that inflation and deflation refer to the rate of change in the prices of consumer goods and services, in order for them (the central banks) to pursue their goals. The true definition of inflation and deflation refers to the rate of change in money and credit in an economy.

As money and credit are inflating, it can sometimes feed through into increasing consumer prices. However, the relationship is patchy at best. Since the great Quantitative Easing experiment (or last roll of the dice, as I like to call it) started over a decade ago, though, the relationship between the growth of money vis-à-vis asset prices has garnered some attention.

The chart below shows the annualized rate of growth in M2 Money Supply alongside the annualized change in the S&P 500 index. A tenuous relationship exists but, of course, a correlation does not imply causality. Nevertheless, we can see that M2 growth accelerated in March 2020, leading the rise in the stock market. Equally, M2 growth decelerated in March 2021, again leading the S&P 500, this time in decelerating.

The latest M2 numbers, for June, show that the disinflation in money is continuing. This is acting as an anchor on asset price growth and, as it continues, may well result in asset price deflation.

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