The velocity of money in the U.S. has been consistently falling for nearly a decade but is now starting to see a sustained pickup. It could be the first real sign of inflation in the U.S. after years of stagnation.
What it means: The velocity of money is a measure of how quickly money is spent in a given time period. It's a metric used to determine whether people in a country are spending and saving and at what rate.
Details: Having a higher velocity of money usually means a country is further along in the business cycle and should have a higher rate of inflation. "If the velocity of money is increasing, then more transactions are occurring between individuals in an economy," notes the St. Louis Federal Reserve.
The big picture: As the Fed has sought to stimulate growth in the U.S. economy through bond buying and low interest rates, the amount of money stock has risen to record highs while the velocity of money has fallen to record lows.
- "[N]ear zero interest rate policy experienced over the last 10 years encouraged consumers to save more and shore up their personal balance sheets," says Nancy Tengler, chief investment strategist at Tengler Wealth Management, in a note to clients.
- "We would expect to see velocity increase. As U.S. economic expansion continues this will boost economic growth further. At what rate remains to be seen."