Steady money growth, swinging prices
A policy rate reaches prices through credit and the money supply, not directly. Trace that path, then read the years when Philippine money growth stayed near 7-9% while inflation swung between 1.35% and 8.68%.
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?
The Philippine pair is unusually clear: the money aggregate grew at a fairly steady pace while the price index swung widely.
What do the two series actually show?
PH M2
Shared linear scale from zero. Selected entries from the table below. Its dates, units, definitions and limitations still apply.
| Twelve months to | PH M2 | PH CPI | US M2 | US CPI |
|---|---|---|---|---|
| June 2021 | +7.25% | +3.74% | +12.61% | +5.30% |
| June 2022 | +8.36% | +6.09% | +5.74% | +8.98% |
| June 2023 | +7.27% | +5.40% | -3.92% | +3.07% |
| July 2026 | +9.02% | +6.19% | +5.41% | +3.30% |
Across these observations Philippine money growth moved within about two percentage points, while inflation ran from 1.35% in the year to June 2025 to 8.68% in the year to January 2023. 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 two Philippine series 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.
For an economy where food is a large share of the consumer basket, a single harvest or import decision can move the headline index by more than a year of money growth does. Read a large move in the index as a question about which components moved, not as a signal about the money supply.
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 is steady, must inflation be steady?
Not within any fixed period. Philippine M2 growth stayed near 7% to 9% between 2021 and 2026, while inflation over the same years ranged from 1.35% in the year to June 2025 to 8.68% in the year to January 2023. 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.
Which measure should I use for my own cost of living?
The consumer price index, because it prices a defined basket of goods and services. M2 describes the size of a monetary aggregate, not what a household pays. The two answer different questions and neither confirms the other.