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Inflation vs M2 Money Supply from 1960

Money Supply growth probably exerts the greater influence on the rate of inflation than any other variable. This chart examines the correlation between the year-over-year rate of inflation with the two year rate of growth in M2. The strongest correlation is with M2 growth leading inflation by 32 months. The double digit bouts of inflation in the mid 1970s and late 1970s into the early 1980s correspond with double digit money growth about the time of the 1972 and 1976 elections.

The best curvilinear fit in the scatter plot suggests that money supply growth at less than 8% has a modest effect on inflation. When M2 grows faster than 8% it begins to have a more accelerated effect on inflation.