Is There Inflation in Our Future?

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Copyright © TXu 2-262-572 March 24, 2021. All Rights Reserved.

This is the executive summary of a much longer piece.  The full article is the pdf below.

“Inflation is always and everywhere a monetary phenomenon.”
– Milton Friedman[1]

Is There Inflation In Our Future Economic Forecasts

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Executive Summary

  • The U.S. money supply (M2) has been growing by double digits since March 2020. The growth rate has been above 20% since May 2020. No matter how fast the economy grows, this growth in M2 must cause inflation. Fed Chair Jerome Powell has shown no inclination to change course anytime in the next two years.
  • M2 will grow even faster starting around July 2021. The Fed will have to increase the money supply to absorb the new debt that must be issued to finance COVID relief spending. I estimate spending for the 12 months beginning July 1, 2020 as $475 billion. That is 15.6% of the average deficit for the four quarters from 2020:IV to 2021:III. That’s a hefty jump in government borrowing.
  • This problem is exacerbated by the “COVID stimulus” of $1,900 billion being considered by Congress. This will stimulate aggregate demand by about $683 billon (after deducting taxes and saving from the personal income component, then applying the income-expenditure multiplier of 1.5). That’s about 2.8% of real gross domestic product in the fourth quarter of 2020. While that may seem like a small number, it will arrive on top of an even larger growth rate of the money supply.
  • Inflation expectations as measured by the difference between the yield on 5 year Treasury notes and the yield on 5 year Treasury Inflation-Protected Securities (TIPS) has risen from 1.98% on January 4, 2021 to 2.48% on March 23. And remember, this is the expected average annual rate over the next five years.
  • Putting it all together, my guess is that inflation over the twelve months beginning July 1 will be 5%. If this makes me an outlier in the inflation forecasting business, so be it.


  1. Friedman, Milton (1970). “The Counter-Revolution in Monetary Theory.” Reprinted in The Road to Economic Freedom, volume 1 (2006), pages 3-29. Elgar Publishing in association with the Institute of Economic Affairs. Cheltenham, UK and Northampton, MA.


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About Tony Lima

Retired after teaching economics at California State Univ., East Bay (Hayward, CA). Ph.D., economics, Stanford. Also taught MBA finance at the California University of Management and Technology. Occasionally take on a consulting project if it's interesting. Other interests include wine and technology.