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M2 Velocity Still At a Crawl

The velocity of M2 for the 2nd Quarter of 2021 was practically unchanged from Q1, and is still slower than a mule after a margarita. The gauge is often used as a measure of the frequency of the exchange of money, and while a rise in velocity is not necessarily inflationary by itself, it's hard to see how we'll get any without it.

While there's a lot of talk about inflation, most of it is due to supply constraints caused by COVID, and while the latest figures of Core PCE (that is, ex-food and energy) are still elevated year over year, it's not as high as the market expected, and you have to expect some pricing disruption as the economy respools, however unevenly. Eventually, these surges in demand will level out into a normal gallop, at least in my opinion, and should keep inflation within norms.

Calculated as the ratio of quarterly nominal GDP to the quarterly average of M2 money stock.

The velocity of money is the frequency at which one unit of currency is used to purchase domestically- produced goods and services within a given time period. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy.

The frequency of currency exchange can be used to determine the velocity of a given component of the money supply, providing some insight into whether consumers and businesses are saving or spending their money.


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