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February 2022

Inflation Climbs Again

New CPI data released this week shows that, despite the claims and wishes of our government leaders, inflation is not going away anytime soon.  Inflation for the year ending in January is estimated at 7.5%, according to the BLS. As the graph below shows, this is the highest U.S. inflation rate in forty years.  


This is not good news.  Perhaps the most discouraging aspect is the reaction of many of our political leaders, who are blaming this inflation on supply chain issues and market power combined with corporate greed. On the one hand, yes, both of these are currently present and both can lead to higher prices. But while those issues might help explain a one time jump in the price level, there is no theory as to how they cause continued price level growth.  Overall supply chain issues are certainly not continually worsening over the past 18 months.  Similarly, corporate greed is not a new phenomenon that suddenly appeared two years ago and is now growing month by month.

Here is an idea - maybe just maybe inflation is caused by changes in the money supply. The graph below shows the U.S. M2 money supply since 2010.  Clearly there is a fairly constant growth rate right up until 2020, when the slope of the line steepens drastically.  That is, M2 didn't just jump at the beginning of the COVID era, the rate of growth increased (the slope of the line) and never returned to the previous level.  In fact, M2 has increased by 40% since the beginning of 2020.  

M2 2022

Granted, M2 is an imperfect measure of our modern money supply. That said, changes in M2 of this magnitude are not irrelevant and changes in M2 can be used as a proxy for changes in the overall level of money in an economy.

Finally, some economists might argue that the new money growth is completely appropriate or necessary in this era of instability and uncertainty.  Fine, but let's recognize and communicate this clear cause of the highest inflation rate we've had since 1982.

Strong Jobs Growth in January

Omicron was supposed to derail the economic recovery but January employment data suggest otherwise.  The Employment Situation Summary, affectionately known as "The Jobs Report," for January estimates job gains of 567,000 in January, far exceeding expectations.  The graph below shows nonfarm employment since January 2012.


As a benchmark, a good month of labor market growth is about 200,000 new jobs a month.  Economists were worried that January might come in at less than 200,000.  However, even with this strong growth, total jobs in the U.S. are still well below the pre-COVID peak of  152.5 million in February 2020.

The labor force participation rate (LFPR) also increased in January - up to 62.2% from 61.9%. And while this also remains well below the pre-COVID highs (see graph below), it is certainly good to see more people entering the labor force. 


Finally, the unemployment rate (graphed below) actually ticked up slightly to 4.0% in January. 


Students often wonder how the unemployment rate can rise when many new jobs are added. In January, this happened because the total labor force grew by 1.4 million. This is not bad news, since many workers are now re-entering the labor force.  Hundreds of thousands found work, but some did not, and so the unemployment rate rose. Even with this increase, the unemployment rate is near previous low levels.