When money growth rises and prices stay flat
A policy rate reaches prices through credit and the money supply, not directly. Trace that path, then read the years when Malaysian money growth nearly doubled while consumer price inflation barely moved.
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 do the two series actually show?
In Malaysia the money aggregate moved a good deal while the headline price index moved very little, and in the United States they moved in opposite directions.
What do the two series actually show?
MY M2
Shared linear scale from zero. Selected entries from the table below. Its dates, units, definitions and limitations still apply.
| Twelve months to | MY M2 | MY CPI | US M2 | US CPI |
|---|---|---|---|---|
| June 2021 | +3.39% | +3.44% | +12.61% | +5.30% |
| June 2022 | +6.51% | +3.41% | +5.74% | +8.98% |
| June 2023 | +3.59% | +2.35% | -3.92% | +3.07% |
| June 2026 | +6.78% | +1.93% | +5.34% | +3.46% |
Malaysian money growth ranged from 3.39% to 6.78% across these observations while headline inflation ranged from 1.93% to 3.44%, and the two did not rise and fall together. In the United States, M2 shrank outright across 2022 and 2023 while consumer prices rose (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 Malaysian M2 series in this dataset begins in January 2013 and the two series carry different reference bases; 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.
Administered prices and fuel subsidies change how much of an imported cost increase reaches the Malaysian retail price. A headline index that barely moves is therefore not evidence that import costs barely moved; it is evidence about what households paid.
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 rises, must inflation rise with it?
Not within any fixed period. Malaysian M2 growth nearly doubled between the year to June 2021 and the year to June 2022, from 3.39% to 6.51%, while headline inflation moved from 3.44% to 3.41%. 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.
Why did Malaysian headline inflation stay in such a narrow band?
The headline index is what was observed; the reasons are a separate question. Administered prices and fuel subsidies affect how much of an imported cost increase reaches the retail price in Malaysia, so the index and the underlying import cost can diverge. Read the index as a measured outcome, not as a measure of import costs.