EMU and Global Money and Credit Growth Show Some Pick-up

Money growth is accelerating across major monetary center countries with the exception of Japan. Three-month money growth is stronger than six-month money growth across all countries in the table except Japan; three-month money growth also is stronger than 12-month money growth across the table except in Japan.

Looking at money growth rates expressed in real terms, three-month money growth is stronger than 12-month money growth for all countries including Japan. However, that does not mean that money growth is strong; it just means that it's stronger than it was 12-months ago. For example, in the euro area, three-month money growth is still negative, as it is in the United States. However, the United Kingdom and Japan report non-negative values with U.K. money growth in real terms over three months at a 0.7% annual rate while Japanese money growth over three months expressed in real terms is flat. In all comparison, those yield accelerations.

EMU In the European Monetary Union, money growth has been accelerating from 12-months to six-months to three-months steadily. Credit to residents also has been expanding on that timeline as has private credit. Credit growth expressed in real terms also shows progressively improving growth rates from 2-years to 12-months to six-months to three-months. However, those increments are still small and on all those timelines credit growth is still contracting. It's just contracting progressively at a weaker pace.

The chart at the top shows how nominal growth rates of money supply had turned negative and have since been trending more toward zero with the exception of Japan where the money growth rate never really contracted but it edged down and since has stabilized.

Although inflation progress has slowed broadly, there has been little backtracking on the progress that inflation has made since coming down from its peak in these various countries. However, inflation is still above-target in these inflation-targeting countries and that remains a problem especially with the rate of change and inflation having slowed to a crawl. As of March of last year, inflation across these four countries on average still was accelerating. Deceleration began in April 2023. Prices fell the most sharply on average in October and November of last year when the average year-on-year drop for the 12-month inflation rate compared to one year-earlier was -4.4%. That average drop has pulled back to -2.9% April 2024. While that May still seemed large, let’s look more closely. In January, February and March, the average inflation rate that these four countries reported in each of these months was 3.1% and by April that had dropped to only 2.9%. For some countries, shorter trend inflation rates are showing a rising trend. The most recent trend gets more complicated, but all of these countries reached a recent low three-month inflation rate in January-2024 or November-23 or December-23. Compared to their respective lows, current (April 3-month) inflation shows an acceleration averaging 2.1% from those lows. This is not an argument intended to support the notion that inflation is accelerating, just to point out that deceleration has really run into a snag and the future is, therefore, less clear than it seemed at the end of 2023.

In the United States, there has been some backtracking of inflation, and although a few months ago the Fed seemed on a fast track to three rate reductions this year, the Fed has been backtracking furiously with a number of Federal Reserve officials scaling back their expectations for Fed policy this year and a number of private institutions no longer looking for Fed cuts at all from the U.S. in 2024.

Inflation continues to be a cantankerous variable to forecast. While money growth no longer is contracting, and it certainly is showing nothing like the expansion that it had in the COVID period, monetary policy is still broadly moderate or contractionary in real terms, but it no longer seems to be a significant force in the determination of inflation- unless there is some view of long and variable lags a researcher wants to impose on this system that has showcased unstable growth rates of late.

However, everywhere globally unemployment rates are low, and in few places would be call fiscal policy responsible and certainly not contractionary. The ‘peace dividend’ has been spent. Now economies are more likely on some sort of military build-up phase that will pressure fiscal spending. In the U.S., fiscal deficits are expanding less than they did but they're still extremely large and the U.S. continues to face huge fiscal challenges in the year as ahead at a time that government continues to pile new public giveaways into the mix in this election year.

Fiscal policy seems to have moved more to the fore as the inflation threat. Money growth rates seemed to have moved more into neutral territory. In the U.S., there continues to be some interest in the size of the Federal Reserve’s balance sheet and the speed at which it is being shrunk; however, evidence mapping the size of the Fed's balance sheet into inflation is not particularly strong. Fed balance sheet policy seems to have had its biggest impact through announcement effects on market rates in the past or by taking a step in a direction where the change in the balance sheet size seemed to be a signaling mechanism that reinforced some promise that the Fed was making about the direction it was going to move policy. Given the size of global asset markets, it's a little bit hard to believe that the kinds of changes we're seeing in central bank balance sheets are having a substantial impact on stimulus particularly not in this environment where traditional money market multiplier analysis no longer explains how policy works.

Attention is focused in some sense on inflation and on interest rates relative to inflation or more particularly on inflation expectations if there's anybody who thinks they know what they are. U.S. central bankers spent some time focusing on inflation expectations and trying to convince us that interest rates were high enough but subsequently that has not seemed to be true and the Fed has stopped pushing that line of thought for the time being since they seemed to have been referencing the wrong expectations.

Markets continue to generate an outlook for central banks to start reducing interest rates and there continues to be optimism that inflation rates are going to be going down. However, there are some signs that the manufacturing sector has stabilized and with unemployment rates low and labor markets looking relatively tight and with the threat of war and supply disruptions and the likely fiscal implications of all that continuing in the global economy, it gets increasingly difficult to justify inflation optimism. Is that about to change or not?