What’s the Relationship Between the CPI and Increases in Bank Lending? – Mish Talk

February 9, 2022

Year-over-year changes in the CPI vs bank lending via St. Louis Fed (FRED)

I came up with the lead chart after reading this Tweet.

The lead chart shows no relationship between bank lending and the CPI.

Loans and Leases vs CPI Index

CPI index (right) vs bank lending (left) via St. Louis Fed (FRED)

Alf is correct about central bank reserves. But after having played around with various ways to look at bank lending vs the CPI, I draw a blank, as I expected.

However, I did find another example of how things went haywire after president Nixon ended convertibility of gold.

People are looking for the source of recent inflation but it isn’t bank lending or velocity.

CPI Fatally Flawed

One key problem is the CPI is a fatally flawed measure of inflation. It does not track housing or financial bubbles.

Those looking for inflation and not looking at asset bubbles are missing nearly the entirety of inflation.

Yet, consumer inflation did pick up. Why?

Source of Recent Inflation

Three rounds of fiscal stimulus (true helicopter drop money)
Supply chain disruptions due to Covid-19
Change in consumer spending preferences for goods over services.

Points one and two should be self-explanatory. Point three is also related to Covid-19.

People reduced eating out, going to the gym, and going to movies, etc. Those working from home wanted new home office equipment. A stock market boom fueled demand for cars and other goods. Working from home increased demands for suburban homes.

Consumers were full of cash they wanted to spend from three rounds of free money. Then the preference for goods jumped although the number of available workers contracted.