Inflation ahead? US velocity of money hits multi-decade lows

Omkar Godbole FXStreet Contributor

The US velocity of money, as measured by the M2 money stock ratio quarterly seasonally adjusted, has declined to 1.374, the lowest level since at least 1960s, as per the data tweeted by Jeroen Blokland, Portfolio Manager for the Robeco Multi-Asset funds.

The velocity of money equals the average number of times an average dollar is used to buy goods and services per unit of time. Inflation depends on growth in the money supply and velocity of money.

While the Federal Reserve has increased the money supply by leaps and bounds over the years and more so recently to ensure the smooth functioning of credit markets amid the coronavirus crisis, the velocity of money has tanked.

As a result, a sharp rise in inflation looks unlikely. Even so, gold, a hedge against inflation, could continue to rise on the back of the Fed's unprecedented balance sheet expansion. The yellow metal has already gained over 10% this year and was last seen trading at $1,730 per ounce.

Author

Omkar Godbole

FXStreet Contributor

Omkar Godbole, editor and analyst, joined FXStreet after four years as a research analyst at several Indian brokerage companies.

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