Markets in a Minute
Chart: Money Supply and Inflation Over 150 Years
This infographic is available as a poster.
This infographic is available as a poster.
Chart: Money Supply and Inflation Over 150 Years
How closely are money supply and inflation related?
This Markets in a Minute from New York Life Investments shows the trajectory of money supply and inflation, taking a historical look at their relationship since the Industrial Revolution.
Defining Money Supply and Inflation
To start, here is a brief overview of money supply and inflation:
- Broad money supply: measures the amount of money circulating in the U.S. financial system, including assets that can be converted into cash.
- Inflation: measured by the consumer price index (CPI), inflation is the average level of prices in the U.S. based on a basket of goods and services over a given time period.
When more capital is injected into the economy, it can cause consumer demand to grow. Assuming a similar amount of goods and services available, consumers are willing to pay more–which leads to rising prices.
Money Supply and Inflation Over History
Here are the key periods where money supply per capita was the highest in recent history.
Five-year rolling periods were used to eliminate the noise found in one-year periods. As a result, this shows consistent periods of monetary growth, and explains why the recent inflation spike isn’t as pronounced.
As seen in the table below, there were five periods where broad money per capita growth exceeded 50%.
| Time Period | Peak 5-Year Broad Money Per Capita Growth* | 5-Year CPI Growth |
|---|---|---|
| 1902 (Industrial Revolution) | 50% | 0% |
| 1920 (post-WWI) | 76% | 100% |
| 1945 (WWII) | 105% | 36% |
| 1979 (Great Inflation) | 54% | 45% |
| 2021 (COVID-19) | 56% | 13% |
*Rolling 5-year cumulative growth
Source: Lyn Alden, macrohistory.net, St. Louis Fed, Òscar Jordà, Moritz Schularick, and Alan M. Taylor. 2017. “Macrofinancial History and the New Business Cycle Facts.” in NBER Macroeconomics Annual 2016, volume 31, edited by Martin Eichenbaum and Jonathan A. Parker. Chicago: University of Chicago Press. (Mar 2022)
During WWII, the money supply doubled to finance war efforts. Inflation was high during and after this time, particularly in 1946-47, but returned to stability in 1949.
Amid soaring government deficits in the 1970s, inflation climbed upwards. In response the U.S. abandoned the monetary system established in WWII, decoupling from the gold standard, adopting the one we use today.
Today, while money supply per capita has grown 56%, inflation has increased, albeit at a muted rate compared to other periods. In addition, it’s been just two years since the money supply grew at such rapid rates. How inflation will play out in the future remains to be seen.
Two Historical Exceptions
There are two exceptions where inflation didn’t rise as sharply when the money supply increased.
Between 1875 and 1910, the U.S. emerged as a superpower. During this time, several technological innovations took place including the lightbulb, electrification, and the internal combustion engine. With the Spindletop oilfield advancements in 1901, more oil was produced there in one day than in all global oil fields combined.
As a result, this created real growth and vast improvements in productivity rather than inflation.
The second time period is from the 1990s onwards, with the advent of the internet. As computing power and automation improved, it led to productivity gains and deflationary pressures. As seen in the employment cost index, wage growth decreased amid globalization. Despite influxes of money supply, inflation remained low for decades.
What’s Next?
The war in Ukraine has led everything from nickel to wheat and food staples to rise in price. Supply chain disruptions are also fueling higher inflation. Whether or not today’s inflation echoes the price shocks of the 1970s or supply shock of the 1940s (or both) is an open question.
At the same time, the Fed ended its net purchases of Treasuries and mortgage-backed securities in March amid elevated inflation. These emergency measures were used to support the economy during COVID-19. Overall, they totaled $4.6 trillion and the Federal Reserve’s balance sheet doubled over two years.
Going forward, the Fed plans to significantly reduce its balance sheet and raise interest rates. Economists predict inflation will continue to rise in 2022, but long-term forecasts suggest they may fall near the Federal Reserve’s 2% goal.
Markets in a Minute
The Average American’s Financial Portfolio by Account Type
From retirement plans to bank accounts, we show the percentage of an American’s financial portfolio that is typically held in each account.
The Average American’s Financial Portfolio by Account Type
Where does the average American put their money? From retirement plans to banks, the typical financial portfolio includes a variety of accounts.
In this graphic from Morningstar, we explore what percentage of a person’s money is typically held within each account.
Breaking Down a Typical Financial Portfolio
People put the most money in employer retirement plans, which make up nearly two-fifths of the average financial portfolio. Bank accounts, which include checking, savings, and CDs, hold the second-largest percentage of people’s money.
| Account Type | % of Financial Portfolio |
|---|---|
| Employer retirement plan | 38% |
| Bank account | 23% |
| Brokerage/investment account | 14% |
| Traditional IRA | 10% |
| Roth IRA | 7% |
| Crypto wallet/account | 4% |
| Education savings account | 3% |
| Other | 1% |
Source: Morningstar Voice of the Investor Report 2024, based on 1,261 U.S. respondents.
Outside of employer retirement plans and bank accounts, the average American keeps nearly 40% of their money in accounts that advisors typically help manage. For instance, people also hold a large portion of their assets in investment accounts and IRAs.
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Account Insight for Advisors
Given the large focus on retirement accounts in financial portfolios, advisors can clearly communicate how they will help investors achieve their retirement goals. Notably, Americans say that funding retirement accounts is a top financial goal in the next three years (39% of people), second only to reducing debt (40%).
Americans also say that building an emergency fund is one of their financial goals (35%), which can be supported by the money they hold in bank accounts. However, it can be helpful for advisors to educate clients on the lower return potential of savings accounts and CDs. In comparison, advisors can highlight that investment or retirement accounts can hold assets with more potential for building wealth, like mutual funds or ETFs. With this knowledge in mind, clients will be better able to balance short-term and long-term financial goals.
The survey results also highlight the importance of advisors staying up to date on emerging trends and products. People hold 4% of their money in crypto accounts on average, and nearly a quarter of people said they hold crypto assets like bitcoin. Advisors who educate themselves on these assets can more effectively answer investors’ questions.
Markets in a Minute
5 Factors Linked to Higher Investor Engagement
Engaged investors review their goals often and are more involved in decisions, but which factors are tied to higher investor engagement?
5 Factors Linked to Higher Investor Engagement
Imagine two investors. One investor reviews their investment goals every quarter and actively makes decisions. The second investor hasn’t reviewed their goals in over a year and doesn’t take part in any investment decisions. Are there traits that the first, more involved investor would be more likely to have?
In this graphic from Morningstar, we explore five factors that are associated with high investor engagement.
Influences on Investor Engagement
Morningstar scores their Investor Engagement Index from a low of zero to a high of 100, which indicates full engagement. In their survey, they discovered five traits that are tied to higher average engagement levels among investors.
| Factor | Investor Engagement Index Score (Max = 100) |
|---|---|
| Financial advisor relationship | Don’t work with financial advisor: 63 |
| Work with financial advisor: 70 | |
| Sustainability alignment | No actions/alignment: 63 |
| Some/full alignment: 74 | |
| Trust in AI | Low trust: 61 |
| High trust: 74 | |
| Risk tolerance | Conservative: 62 |
| Aggressive: 76 | |
| Comfort making investment decisions | Low comfort: 42 |
| High comfort: 76 |
Morningstar’s Investor Engagement Index is equally weighted based on retail investors’ responses to seven questions: feeling informed about composition and performance of investments, frequency of investment portfolio review, involvement in investment decision-making, understanding of investment concepts and financial markets, frequency of goals review, clarity of investment strategy aligning to long-term goals, and frequency of engagement in financial education activities.
On average, people who work with financial advisors, have sustainability alignment, trust AI, and have a high risk tolerance are more engaged.
The starkest contrast was that people with high comfort making investment decisions have engagement levels that are nearly two times higher than those with low comfort. In fact, people with a high comfort level were significantly more likely to say they were knowledgeable about the composition and performance of their investments (84%) vs. those with low comfort (18%).
Personalizing Experiences Based on Engagement
Advisors can consider adjusting their approach depending on an investor’s engagement level. For example, if a client has an aggressive risk tolerance this may indicate the client is more engaged. Based on this, the advisor could check if the client would prefer more frequent portfolio reviews.
On the other hand, soft skills can play a key role for those who are less engaged. People with low comfort making investment decisions indicated that the top ways their financial advisor provides value is through optimizing for growth and risk management (62%), making them feel more secure about their financial future (38%), and offering peace of mind and relief from the stress of money management (30%).
A New Framework for Personalized Financial Portfolio Alignment
The Average American’s Financial Portfolio by Account Type
5 Factors Linked to Higher Investor Engagement
The Top 5 Reasons Clients Fire a Financial Advisor
The Top 5 Reasons Clients Hire a Financial Advisor
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