Canada Is Slowing Down The Money Printer, But Inflation Relief Is A Long Way Off

Canada’s money printer is still going brrr at a rate not seen in decades, but it’s starting to slow down. Bank of Canada (BoC) data shows the rate of growth for the M2++ is now past its peak as of April. The broad measure of the country’s money supply is a leading indicator for inflation. Falling growth means inflation relief may be in the future, but it’s the distant future. The central bank’s research shows it’s too soon for inflation to have peaked based on the monetary expansion.

Canadian M2++ Money Supply

The M2++ is a broad measure of Canada’s money supply, and measures the vast majority of its money. It includes almost anything you can spend, including chequable deposits. Then throw in other instruments like savings bonds and non-money market mutual funds. The idea is to capture almost any relatively liquid capital that’s “near money.”

BoC research shows it’s one of the most important macroeconomic measures for producing insights into the economy. More specifically, those insights are on inflation, as the rate of M2++ growth is a leading indicator for inflation. The central bank’s research shows the M2++ tends to lead inflation movements by one or two years. They claim an excessive expansion of money will cause inflation. It makes sense since money is being created faster than it can be efficiently allocated.

The Canadian Money Supply Grew 12.8%

Canada’s M2++ is rising and is still growing at one of the highest rates since the early 80s, but growth is tapering. The measure showed an annual increase of 12.8% in April, over 40% higher than last year. It was the largest annual growth for the month of April since 1981. That was way back in the day when inflation slipped out of the BoC’s control.

The Money Supply Growth Is Finally Starting To Slow

As high as it is, annual growth has actually slowed from the recent peak. The growth is coming down from the recent peak of 14.33% hit in February. It still has a long way to go before it comes down to stable levels. Monetary expansion in the late 70s and early 80s didn’t exactly produce a comfortable environment to live in. 

Canadian Monetary Supply (M2++) and CPI

The annual percent change for the M2++ gross monetary supply, and annual change in CPI.

Source: Bank of Canada; Stat Can; Better Dwelling.

Inflation Generally Trails The Peaks and Troughs of Money Supply

The rate of growth for the M2++ isn’t a perfect relationship, but the relationship is still visible. The peaks and troughs for the M2++ growth rate are followed by similar movements in the CPI rate of growth. It becomes a little more visible if you shift the M2++ growth line over by 12 months. The growth rate directions become much more obvious. For those that can’t mentally visualize it, here you go.

Canadian Monetary Supply (M2++) 12-Month Delay

The annual percent change for the M2++ gross monetary supply shifted 12-months into the future. This helps to visualize the relationship between the monetary supply and CPI inflation.

Source: Bank of Canada; Stat Can; Better Dwelling.

The central bank research indicates inflation will taper, but it’s quite far away. Research indicates the country may not have even seen an inflation peak yet. With the M2++ growth topping only in February, it may not be stable until next year. That’s something the BoC has more loosely recognized. Though they did so without directly attributing it to the monetary expansion.

One would hope the central bank wouldn’t let rates run for that long. Though they’re trying to balance the risk of raising rates and not crushing highly indebted households. When organizations like the IMF say household indebtedness is a risk to the economy, this is the situation they’re referencing.

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  • Nassim 2 years ago

    Does anyone have an idea of how we can measure real inflation, and not the Stat Can version where a change in gas prices can increase the whole cost of living for people by 40%, which is not grounded in reality in any way.

    • Canaduh 2 years ago

      Everyone technically has their own personal CPI, since everyone consumes a different basket of goods. Generally Stats Can does a good job tracking the average basket across all Canadians, however in practice the average may not represent the majority of folks clustered in certain areas, demographic groups, etc. Exactly what you’ve identified.

      A suggestion would be to research how CPI is calculated, and then consider swapping out individual components for what you feel is more representative of your reality.

      • Ghl 2 years ago

        Well technically, from someone with real financial industry experience its possible to do cpi for each individual and find the total real CPI.
        How? Just get analytic teams from our big banks to do an analysis on credit card spending to track CPI down to transaction level and sum and compare month over month basis. Will cost millions, since guys with math degrees from UofT aren’t cheap. But you can get it done.

  • D 2 years ago

    How to kill inflation. Corporations take cheap loans and pay off their old higher interest loans. Paying off loans reduces the money supply. If that doesn’t happen then we will all be millionaires.

  • Vjkenny 2 years ago

    Even if money supply’s GROWTH decrease (not money total supply) it will not make a huge difference. The total money supply has already expanded by a lot. That will propagate through the economy and most likely settle in assets such as stocks, durable good and real estate.

    I think its irresponsible to mislead people into thinking asset prices will decrease at this point. Anything short of 5% interest will not force prices lower because the inflation rate is at least 4%. Holton was right, we are most likely going to see long term inflation.

    • BOC Goon 2 years ago

      Bank of Canada PhD researchers spend their whole lives working on monetary policy, and then some anonymous guy on the internet says they’re wrong who doesn’t need any stinkin’ book learnin.

      You should at least learn the difference between a slowdown in capital velocity and decline. A slowdown in velocity might as well be a drop, since that’s the rate of growth forward valuations are based on. Just like when a company sees revenues fall (not decline) it impacts the valuation of future prices. That, but now the whole economy and its goods.

      • Vjkenny 2 years ago

        Im pretty sure you have no PHD in anything. Probably not even high school math. No one dose present value calculations based on accelerating growth. Oh you probably didn’t understand a word I just said. Random guy on internet with no PHD and have no idea about valuations. No, prices will not fall since total money supply wont fall. Maybe actually learn some basic math before you vent here. Your arts degree is showing.

        • Mitch 2 years ago

          I don’t know or care what you two are talking about really, but companies base the valuation of companies on the rate of growth of their revenues.

          A company’s valuation doesn’t require negative growth for it to lead to lower prices, just a slowing of future growth since prices are based on the pain of delayed buying vs present consumption.

          Just thought I’d throw that in for both of you, that’s how it’s looked at from the perspective of an analyst. If either of you are a professional, you can sign up for the forum if I’m not mistaken. You need your work email, and there’s plenty of discussions on velocity.

          Have a great weekend both of you, and try not to fight with strangers on the internet.

        • Tony 2 years ago

          MV=PY so a slowdown of money growth can, over time, lower inflation if economic output catches up even though we don’t decrease monetary supply from a total standpoint.
          But be sure, I am not discounting the idea that this dramatic jump in monetary supply comes with serious risks and concerns.

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