The table below shows the different inflation measures providing a quick glance on CPI inflation. 3-month annualized rates provide a metric for instantaneous inflation while YoY CPI is normally used as the headline measure, as it adjusts for seasonal effects over the year.
The table below shows US treasury bond yields and real yields, after subtracting YoY CPI.
Monetary Policy
The result of the policy actions by the Fed, as a response to the Covid-19 pandemic in 2020, led to an unprecedented swings in the money supply, as measured by the M2 aggregate. In 2020 and 2021 the M2 money supply surged by about 37% and in 2022 and 2023 suffered an unprecedented drop which came as a surprise, as the last time we saw a drop in M2 was during the Great Depression of the 1930s.
The impact of these policy actions from 2020 onwards, led to the monitoring the Fed balance sheet and money supply becoming an absolute necessity if one wants to havea a handle on inflation. The table below summarizes the main monetary variables for this effect.
Having warned in 2021 and 2022 that persistent inflation going forward was a real risk, after the extreme
policy actions by the Fed, from 2023, the tightening of monetary policy and the decline in M2 led us to believe that disinflationary forces were the main risk.
However, we also believe that in the longer-term, inflation will the the greatest risk facing investors portfolios. Investors will be riding an inflation roller coaster which is characterised by periods of inflation interlaced with periods of disinflation and some short episodes deflation scares.
The Hormuz closure energy shock that started in March 2026 is an extra confounding factor to the mix. If energy shocks are severe or long lasting, they could lead to recessions and monetary policy intervention, but if short lived, these energy shocks will only become a confounder towards discovering real underlying inflation trends.
We have developed research reports on inflation that tackle the different aspects of inflation and allow us to untangle the short-term, medium-term and long-term trends in inflation. Our tools include:
-> Monetary approach to anticipate long-term changes in inflation.
-> Proprietary Early Inflation Indicators (EIIs) for both CPI and coreCPI. This anticipate inflation on a 9m to 15m time scale.
-> Energy model that allows to anticipate CPI changes on a short-term time scale.
-> Dashboards to track inflation metrics, monetary policy, central bank balance sheet and key inflation components.
-> Inflation is a hot topic at the moment. After lying dormant since 1990, it sems as though inflation has made an unexpected comeback. If in the last decade, deflationary forces seemed to dominate the macroeconomic landscape, the Covid-19 pandemic brought about significant political and social changes.
-> Inflation is a key economic variable in the economy. It has a large impact on the bond market which through the setting of rates of interest moderates the economic growth. Bond investors and central bankers all monitor inflation and bond yields as the key barometer for the status of the economy.
-> Due to this position of the US in the global economy, we believe that future inflation in the US will spill over to the rest of the world, as countries will need to increase their money supplies in order to keep their exports competitive with the US. Inflation in the US does not mean that the USD will decline relative to other currencies but mostly relative to real assets whose supply is fixed or slow growing.
-> Global investors who have exposure to the bond market.
-> Industry Sectors or activities that have interest rate exposure (Banks, Real Estate, Leveraged Buyouts, etc).
-> Corporations or investors who are exposed to commodities.
-> - Investors or asset allocators who are uncertain of how to quantify risks and opportunities due to different inflation outcomes in the coming decades.
-> Risk managers who want to measure inflation risk and perform educated guesses on different inflation scenarios.
PHINANCE TECHNOLOGIES