12/27/23 10:56 AM EST

Why the Biggest Money Supply Drop Since the 1930s Hasn't Stopped Inflation

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

We're seeing an interesting trend: money supply has contracted for a full year, marking a 4.5% dip to date. Surprisingly, the economy hasn't taken the hit we'd expect from the first significant money supply drop since the 1930s. This anomaly is thanks to the colossal liquidity infusion of 2020–21, which has delayed the impact as the vast savings buffer gets chipped away, maintaining relatively flexible credit conditions despite the tightening of money.

Yet, here's the kicker: price inflation remains stubbornly high. The Bureau of Labor Statistics reports a 3.1% year-over-year rise in CPI for November. With money tightening, we'd typically see inflation cooling off to below 2.0%, but it's sticking above that mark. The culprits? Hefty government spending, pricing power in consolidated industries, and the continued use of new currency created in the pandemic keep inflation stickier than it has been.

Learn more about the Market Situation Report written by Tier 1 Alpha.