Remember the "Ms," the money supply measures such as M1 and M2? Monetarism, and the belief that the growth in the money supply had a predictable link to the economy's performance, held sway on Wall Street and in Washington from the early '70s to the mid-'80s. But monetarism fell out of favor after erratic swings in the money supply time after time misled traders and policymakers.

Still, although many of monetarism's mechanical rules failed, the main insight of Milton Friedman, Karl Brunner, and other monetarist pioneers holds: Money matters, and lasting changes in prices are basically a monetary phenomenon.

What are the Ms telling us? The growth in the main money supply measures has slowed since the beginning of 1999. The money numbers suggest price stability. They both reflect and reinforce the many forces combating inflation today, including strong productivity growth and fiscal restraint. To be sure, higher energy prices will momentarily drive up the reported Producer Price Index and the Consumer Price Index. But the so-called core price figure - the PPI and the CPI minus energy and food - should remain flat. The money supply figures also imply that the Federal Reserve's campaign to rein in the economy has worked, as do disappointing corporate earnings and the carnage in the stock market. But the expected nerve-wracking adjustment to a more moderate growth path is taking a stomach-churning turn for the worse as the turmoil in the Middle East pushes oil prices higher. The Fed should heed the message in the money numbers and the stock market. Don't worry about inflation. But be prepared to support the economy.

 


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