4/26/07
US government-reported inflation statistics, especially as represented in the Consumer Price Index, significantly understate the true inflation rate. Inflation follows the growth in the US dollar money supply. So how fast is the US dollar money supply growing? The best measure of money supply growth is M3, which the US Federal Reserve stopped publishing in the last few years, probably because it was becoming embarrassing. But as indicated in the article quoted below from http://www.rte.ie/business/2006/0127/ecb.html , the European Central Bank still publishes M3 statistics for the Euro:
Friday, 27 January 2006
The slowdown took analysts by surprise. Consensus forecasts had been for money supply growth of around 7.5% for December. The ECB closely monitors developments in the money supply when deciding the appropriate level of interest rates because it sees a link between the level of liquidity in the economy and future inflation.
The ECB calculates that the money supply needs annual growth
of around 4.5% to serve as a basis for non-inflationary economic growth. But
the M3 money supply, which covers cash, overnight deposits, other short-term
deposits, repurchase agreements, shares and units in money market funds and
debt securities with a maturity of up to two years, has been growing much
faster.
…with current economic indicators pointing up and immediate inflationary dangers also increasing as a result of high oil prices, the ECB is now paying more attention to monetary developments.
Indeed, as noted at http://www.nasdaq.com/econoday/reports/US/EN/New_York/ecb_ann/year/2007/yearly/03/index.html , M3 is one of the two pillars the European Central Bank relies on to monitor inflation.
In the last 12 months Euro M3 growth has risen to as much as 10%, as indicated in the statistics found at http://www.economagic.com/ecb.htm . What is especially remarkable about this information is that the US dollar has been depreciating relative to the Euro (for example, see http://www.actionforex.com/forex_analysis_and_forecasts/long_term_forecasts/long_term_analysis_-_euro_vs_u.s._dollar_2007041620176/ ), which implies that its money supply growth is greater than the Euro. In other words, US dollar M3 growth is likely as great or greater than 10% per annum. US dollar inflation then is likely 10% or greater. That is significantly greater than the US government would like to admit.