Here’s one for the inflation vs deflation debate.
According to the latest figures from the European Central Bank, there was an unexpectedly large bounce in eurozone M3 money supply in August.
This, for example, is how the turnaround looks when graphed. Substantial indeed:
(Hat tip to Sean Corrigan of Diapason Commodities for the chart.)
M3 money supply, of course, is a measure of cash readily available to spend — and is also the ECB’s preferred leading indicator for predicting inflation.
A sharp bounceback, as above, hence potentially implies some cause for inflationary concern.
Although, in the opinion of Davide Stroppa, economist at Unicredit — it perhaps means a simple recovery of growth in money and credit to the private sector, more than anything else:
Eurozone M3 yearly growth in August increased much more than expected, to 1.1% vs. 0.2% in July, showing a positive monthly flow of EUR 81bn. This represents the highest rate of growth since September 2009 and, as we have stressed several times, remarks that the recovery trend in M3 is well-grounded.
In addition, further evidence comes from the fact that M1 growth seems now on a clear declining trend, decreasing from 8.1% to 7.7% yoy in August. Credit to the private sector kept increasing as well, accelerating to 1.2% from 0.8% yoy (the latter revised slightly downward form the previous 0.9% yoy).
The counterpart analysis fully matches our picture of the credit cycle at this juncture, with household lending already consolidating its recovery, and corporate lending now exhibiting an upward trend. In detail, in regard to loans to households, the yoy growth accelerated from 2.7% to 2.9%. Once again, this was driven by lending for house purchase, which marked the eleventh consecutive increase and now stands at 3.5% yoy.
In regard to corporate lending, the yearly growth rate remained in negative territory, but increased from -1.4% to -1.1%, the highest pace over the last year. More importantly, as we expected, loans to non-financial corporations showed in August a positive monthly flow of EUR 17 bn. Summing up: The August figures on monetary developments do not provide meaningful surprises.
The recovery of growth of money and credit to the private sector seems to proceed, the latter being well supported by the pick-up in household lending and by progressive improvements in corporate lending. Nevertheless, as credit developments remain rather contained, the risks of inflationary pressures stemming from the monetary channel remain indeed limited.
Let the debate rage on.
Related links:
A deflation refresher – FT Alphaville
Why is deflation bad? – Paul Krugman, NYT
Deflation fears gain upper hand as debt crisis curbs growth - FT
That receding, deflationary, resurfacing … M3 money supply – FT Alphaville