At American Money Management (AMM) we view inflation as one of the key risks to the sustainability of this economic recovery. However, there is a marked difference between recent headline inflation and core inflation.
Inflation – Headline inflation (which includes food and energy) has already perked up, while core inflation (excluding food and energy) remains at very low levels. The Fed views headline inflation as transitory as price movements in food and energy are historically volatile, and therefore difficult predictors of real monetary inflation (i.e. too much money chasing too few goods). While it doesn’t appear to be an immediate threat, a strong up-tick in core inflation could prove to be very harmful to future growth.
- Q2 2011 Client Letter (soon to be released)
The reason we do not see high generalized/core inflation right now is the growth of money is still very low. The first chart below is the M2 Money Multiplier going back to February 2000. Notice the collapse in late 2008.
The second chart is the M2 Money Multiplier for the past year.
Money growth as measured by the M2 Money Multiplier remains subdued and in a downward trend. It is one more reason why the Federal Reserve maintains an accommodative monetary policy. It is also why we’ve positioned portfolios this last year more towards headline inflation rather than core inflation, commodities over TIPS. We still maintain our position in TIPS that was started in Late 2008/early 2009 but we are not looking to add further capital to this asset right now.
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