Chart of the week
Loan Growth & Velocity of Money
After declining for 11 consecutive quarters and for 26 out of the last 27, the velocity of money increased in both Q3 and Q4 2017.
As indicated in this simple formula, the velocity of money is a function of both money and prices:
V = PQ / M, where:
V = velocity
P = general price level
Q = quantity of goods and services
M = money supply
Velocity of money is the number of times one unit of money is spent to buy goods and services in a given unit of time. It is an indication of a willingness to spend money; that willingness can be affected by the quantity of credit formation. It is perhaps no fluke that the two consecutive increases in velocity coincided with the first increase in loan growth1 in more than a year.
Loan growth not only increases money supply (M), but also has a positive correlation with velocity of money (V). If Q and M rise at the same rate, a higher velocity (V) means a higher price (P).
In addition to both the price of gold and breakeven inflation rates pushing higher in recent months, this potential inflection of money velocity may be another sign that higher inflation is not far off.
1As measured by the growth in notional loan amounts held by the US banks listed in the S&P Banks Select Industry Index.
Unless otherwise noted, data is sourced from Bloomberg.
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