When money growth falls and prices keep rising
Tightening reaches prices through credit and the money supply, not directly. Trace that path, then read the months when Singapore and US money growth were slow while consumer prices rose fast.
How does tightening reach prices?
Not directly. Policy 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 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 was slow and prices rose fast?
In 2022 and 2023 the two series moved apart in Singapore and in the United States at the same time.
What happened when money growth was slow and prices rose fast?
SG M2
Shared linear scale from zero. Selected entries from the table below. Its dates, units, definitions and limitations still apply.
| Twelve months to | SG M2 | SG CPI | US M2 | US CPI |
|---|---|---|---|---|
| December 2022 | +1.81% | +6.47% | -0.97% | +6.40% |
| June 2023 | +3.24% | +4.52% | -3.92% | +3.07% |
| June 2024 | +1.47% | +2.52% | +1.31% | +2.97% |
| June 2026 | +4.02% | — | +5.34% | +3.46% |
Singapore money growth stayed below 4% through the period in which consumer prices rose more than 6%, reaching 7.49% in the year to September 2022. US M2 shrank outright across 2022 and 2023 while US consumer prices rose (FRED M2SL, FRED CPIAUCSL).
The Singapore M2 series in this dataset begins in July 2021, so no twelve-month change is available before July 2022, and the Singapore price series ends in April 2026, which is why the June 2026 cell is empty. M2 is also defined differently in each jurisdiction, so read the columns as directions within one economy rather than as levels to compare across economies.
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 tightening of 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.
Singapore conducts monetary policy through the trade-weighted exchange rate band rather than a policy interest rate. For an import-heavy economy that route reaches import prices first, which is a different entry point from the credit channel described above.
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 tightening lower prices directly?
No. Tightening 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 policy move does not by itself show the move had no effect.
If money growth is slow, must inflation be low?
Not within any fixed period. Singapore M2 grew 1.81% in the twelve months to December 2022 while consumer prices rose 6.47% over the same period. 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 tightening of credit at the same time.
Does Singapore set a policy interest rate?
Not as its main instrument. The Monetary Authority of Singapore conducts policy through the trade-weighted exchange rate band rather than a policy rate, and domestic interest rates are largely determined by global rates. The first link in the chain above therefore looks different here.