An inversion of M2 and the CPI: a reliable recession signal

With the US' M2 growth decelerating sharply, as opposed to inflation, a significant recession should now be the major concern

Alongside the US delivering its second consecutive quarter of negative GDP growth in Q2 2022, another key event occurred—an inversion between M2 and the Consumer Price Index (CPI). Though it went largely unnoticed, this is an extremely important event. I define an inversion between the money supply and inflation as occurring when the year-on-year (YoY) growth rate of inflation (i.e. the CPI) increases at a faster rate than the YoY growth rate of M2 (which for the US, is the broadest measure of the money supply provided by the Fed).

When do inversions of M2 and the CPI most commonly occur?

M2 generally increases at a faster rate than the CPI across most time periods. This is largely a result of general improvements in productivity across most time periods, which act to offset the inflationary impact of M2 growth.

Though following periods where there has been an artificial increase in the money supply (which is generally caused by large government deficits financed by the Fed), inversions …