U.S. M2 Money Supply Grew at Fastest Pace in 3 Years as Inflation Hits 3.4%

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The U.S. M2 money supply grew roughly 5.4% year over year in July, the fastest pace since June 2022, a development some economists view as an ominous sign with inflation running at 3.4%. August inflation came in 3.4% higher year over year on a seasonally adjusted basis, according to the Consumer Price Index, while core CPI, which excludes volatile food and energy prices, rose 2.4%. The acceleration in M2 growth could stem from the Federal Reserve ending quantitative tightening last December and effectively restarting quantitative easing through what it calls reserve management purchases, as well as from rising asset and stock prices and growth in bank lending. The Fed's own views on M2 have differed: current Chair Kevin Warsh told Congress that had the Fed paid closer attention to M2 during the pandemic it might have seen the high inflation coming, while former Chair Jerome Powell said five years ago that M2 does not really have important implications for the economic outlook. Between May 2020 and March 2021, M2 grew at least 20% annually each month, reaching nearly 27% in one month during that window.

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