A brighter sign is M2 growth, which was 5.3% year-over-year in July 2022. With 2% economic growth, that is consistent with inflation of a little more than 3%, assuming changes in monetary velocity do not intervene. Better yet, M2 growth rates have been falling consistently, from almost 14% in August 2021.
One way of thinking about all this data is that the U.S. is likely to be converging on lower inflation rates—but that interest rate policy is overrated in its efficacy. That perspective follows naturally from quantity theory tools.
Some analysts stress that lowering the rate of inflation requires big changes in fiscal policy. That is usually true for bankrupt nations, which have to print money to pay the bills. But for solvent nations such as the U.S., this is not necessary.
I predict rates of price inflation will fall significantly over the next three to five years without a very dramatic change in the U.S.’s overall fiscal position. If I am correct, it is worth noting, that will represent a triumph for the Quantity Theory of Money.
Tyler Cowen is a Bloomberg Opinion columnist. He is a professor of economics at George Mason University and writes for the blog Marginal Revolution. His books include The Complacent Class: The Self-Defeating Quest for the American Dream.