M2 Money Supply (Year-over-Year Change) vs PCE Price Index (Year-over-Year)

What M2 Money Supply (Year-over-Year Change) measures

M2 is a measure of the money supply that includes cash, checking deposits, savings deposits, money market funds, and small time deposits. Year-over-year changes in M2 are a leading indicator of inflation and economic activity.

M2 growth has recovered to 3.9% year-over-year after an unprecedented contraction in 2023 (the first in modern history). The normalization of money supply growth supports economic activity without being excessively inflationary. For executives, moderate M2 growth (3-5%) is consistent with a healthy economy — it means enough liquidity to support business activity without fueling the kind of excess that drove 2021-2022 inflation.

What PCE Price Index (Year-over-Year) measures

The Personal Consumption Expenditures (PCE) price index is the Federal Reserve's preferred inflation measure. It tracks prices of goods and services consumed by households and adjusts its basket dynamically as consumers shift spending patterns.

PCE at 2.5% is closer to the Fed's 2% target than CPI, giving the Fed more room to consider rate cuts. The PCE tends to run 0.3-0.5 points below CPI because it accounts for consumer substitution (switching to cheaper alternatives when prices rise). For executives, the PCE trajectory suggests inflation is on a downward path, which should eventually lead to lower borrowing costs.

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