The US M2 money supply has returned to pandemic-era peak levels, while multiple inflation indicators show price pressures are re-accumulating, sparking market concerns about a "second wave" of inflation. Economists warn that further monetary easing under current conditions could repeat the historical tragedy of the three-wave inflation cycle of the 1970s.

Latest data shows the US Producer Price Index (PPI) has risen to a high of 3.3%, while M2 money supply growth is trending toward a dangerous level of 5%. This combination is reminiscent of the 1970s inflation cycle, when the central bank prematurely loosened policy after inflation initially declined, ultimately triggering more severe second and third rounds of inflationary shocks.

Analysts note that while the Consumer Price Index (CPI) remains relatively stable for now, wholesale price increases typically transmit to the retail level, and rapid money supply growth provides ample "fuel" for future inflation. Under current circumstances, Fed Chair Powell's reluctance to cut rates may be a wise move.

Economists worry that if policymakers repeat the mistakes of the 1970s—rushing to stimulate the economy before inflation is completely eliminated—the US could face more severe price shocks than experienced over the past five years.

Money Supply Returns to High Levels, Sounding Inflation Alarm

A key variable in current inflation risk assessment is M2 money supply. Data shows that during the 2020 COVID pandemic, the Federal Reserve implemented zero interest rates and dramatically expanded money supply, causing M2 to reach historic growth levels. Subsequently, the Fed withdrew some excess liquidity from the system through tightening policies such as rate hikes.

However, analysis suggests these tightening efforts essentially stopped before the 2024 election. As a result, total M2 has now returned to previously established peak levels. More concerning is that its annualized growth rate is approaching 5%, a historically high level typically associated with inflation risks. Analysis indicates that if the Fed succumbs to rate-cutting pressure, M2's growth trend will only accelerate further.

Beyond money supply, recent price data also provides evidence for inflation concerns. The latest CPI data has been described by markets as "quite hot."

Meanwhile, PPI's 3.3% year-over-year increase directly reflects cost pressures at the wholesale level. PPI is typically viewed as a leading indicator for CPI, and its rise suggests consumers will face new price increases in the future.

Evidence indicates this round of upstream price increases stems more from monetary factors rather than tariffs. Analysis points out that many importers are absorbing tariff costs by compressing their own profit margins, without large-scale pass-through to consumers yet. Analyst David Stockman notes that core PPI excluding food and energy has risen 33.3% since January 2017, equivalent to a continuous climb at an average annual rate of 3.4% over the past eight and a half years. Another closely watched Truflation index also shows consumer goods and services prices are trending upward.

Historical Warning: Repeating the 1970s "Three-Wave Inflation" Mistake?

Economists' greatest concern is that the US may be replaying the 1970s script. During that period, America experienced three consecutive waves of inflation: after inflation briefly declined, it returned with greater ferocity, and the central bank's repeated misjudgments ultimately led to catastrophic economic consequences.

After the first round of inflation erupted and subsequently declined, the central bank mistakenly believed it had conquered inflation, cutting rates prematurely and loosening policy. This triggered a higher second wave of inflation. After authorities made the same mistake again, the third wave of inflation reached double digits, destroying American capital stock and forcing millions of young mothers into the workforce to maintain household finances.

The lesson from that period was that central bank officials' complacency—believing they had defeated inflation—was key to subsequent policy errors. They failed to precisely control the monetary machine at the time, with loose policies adding fuel to the fire. Currently, markets worry history may repeat itself.

Political and Economic Risks Behind Rate Cut Calls

The current inflation backdrop makes policy divergence between the White House and Federal Reserve increasingly prominent. The Trump administration has consistently called publicly for rate cuts, with obvious motivations: lower rates can make mortgage loans more affordable, reduce government interest pressure on debt service, and stimulate business investment. Nearly every new administration tends toward low interest rate environments because they can create the appearance of economic growth in the short term and provide more room for government spending.

However, the flip side presents enormous risks. Another wave of inflation could damage Trump's second-term credibility and might be attributed to his tariff policies. Against this backdrop, Powell's stance of resisting rate-cutting pressure is viewed by some observers as the behavior of a "responsible central banker." The market's real concern is that once Powell's position is replaced, his successor may face the sole task of lowering interest rates.