When money growth falls and prices keep rising
A policy rate reaches prices through credit and the money supply, not directly. Trace that path, then read the months when Hong Kong and US money growth fell while consumer prices kept rising.
How does a policy rate reach prices?
Not directly. A policy rate sets the cost of credit; less new credit slows the growth of the money supply; a slower-growing money supply weakens demand; weaker demand pulls prices down. Prices are the fourth link in that chain.
The second link is the one that is easy to miss. Most of what M2 counts is bank deposits, and most bank deposits are created when a bank makes a loan. Tightening policy is therefore less an act on prices than an act on the rate at which new money is created.
That chain works on prices driven by demand. When prices rise because an input costs more — freight, fuel, refining capacity — the chain still trims demand, but it does not touch the cost that started the increase.
What happened when money growth fell and prices kept rising?
Both series are available for Hong Kong and the United States, and in 2022 they moved in opposite directions in both places.
What happened when money growth fell and prices kept rising?
HK M2
Shared linear scale from zero. Negative values extend left. Selected entries from the table below. Its dates, units, definitions and limitations still apply.
| Twelve months to | HK M2 | HK CPI | US M2 | US CPI |
|---|---|---|---|---|
| June 2021 | +10.91% | +0.70% | +12.61% | +5.30% |
| June 2022 | -2.78% | +1.88% | +5.74% | +8.98% |
| June 2023 | -0.11% | +1.94% | -3.92% | +3.07% |
| June 2026 | +2.65% | +1.94% | +5.34% | +3.46% |
Hong Kong M2 was smaller in June 2022 than a year earlier, and smaller again in June 2023, while consumer prices rose in both years and reached 4.33% in the year to September 2022. US M2 shrank across 2022 and 2023 while US consumer prices rose 6.40% in the year to December 2022 (FRED M2SL, FRED CPIAUCSL).
M2 is defined differently in each jurisdiction, so read the columns as directions within one economy rather than as levels to compare across economies. The two Hong Kong series also carry different reference bases and release schedules; check the observation month on the data page before reusing a figure.
Why can a cost shock raise the money supply?
Because a higher input price raises the amount of credit a business needs to run unchanged. Buying the same cargo at a price 30% higher requires roughly 30% more working capital, and bank lending creates the deposits that M2 counts.
So during an energy or freight shock two forces act on the money supply at once: a central bank tightening credit, and higher input costs pulling credit demand up. Which force dominates is an observation for a particular period, not a rule.
What should you check in your own numbers?
Start with the observation month on both series. A money aggregate and a price index are published on different schedules, and comparing a recent month of one with an older month of the other creates a gap that has nothing to do with the economy.
Hong Kong's Linked Exchange Rate System keeps the Hong Kong dollar within 7.75-7.85 per US dollar, so local interest rates follow US rates rather than local price data. Read the first link of the chain above as a decision made outside Hong Kong.
Then separate what each measure answers. M2 describes a monetary aggregate; CPI describes a defined consumer basket. Neither is the other’s confirmation.
Questions & answers
Does raising a policy rate lower prices directly?
No. A policy rate changes the cost of credit. Less new credit means a slower-growing money supply, a slower-growing money supply means weaker demand, and weaker demand is what pulls prices down. Each link takes time, so an unchanged inflation rate shortly after a rate rise does not by itself show the rate had no effect.
If money growth slows, must inflation follow?
Not within any fixed period. In the twelve months to June 2022 Hong Kong M2 fell 2.78% while Hong Kong consumer prices rose 1.88%, and in the twelve months to June 2023 US M2 fell 3.92% while US consumer prices rose 3.07%. Over decades the two series move together; over one to three years they often do not.
Why can a cost shock raise the money supply?
Because a firm buying the same quantity of an input at a higher price needs more credit to fund it. Bank lending creates deposits, and those deposits are counted in M2. That pull works in the opposite direction to a central bank tightening credit at the same time.
Does this apply to Hong Kong in the same way?
Only partly. Under the Linked Exchange Rate System, Hong Kong interest rates track US rates rather than local inflation, so the first link in the chain is set outside Hong Kong. The money supply and price data still describe what happened, but the policy rate is not a local decision.