Global Liquidity Surge Could Be Fueling the Next Inflation Wave

The volume of global M2 money supply has expanded by an extraordinary $17+ trillion. It is one of the less frequently discussed explanations for the persistently elevated inflation seen across the major economies. On a year-on-year basis, M2 has increased by approximately 15%. Admittedly, there is a degree of statistical distortion involved, given that the US dollar has weakened somewhat over the past year, mechanically inflating the dollar-denominated calculation. However, that effect is relatively insignificant in the context of the broader move. For comparison, during the inflationary surge of 2021–2022, global M2 growth amounted to only around 5%, if not slightly less. If historical relationships hold, the consequences of this latest monetary expansion ought to become rather more apparent as the year progresses. Oil has already responded, with prices up roughly 15% year-on-year, whilst some forecasts are now suggesting copper could reach $15,000 per tone. In short, matters appear to be unfolding broadly as expected — although it is hardly the sort of plan one would wish to see realized.

The principal difficulty is that this monetary expansion is taking place not against a backdrop of weak demand and abundant supply, but rather in an environment characterized by constrained commodity markets, a tight labor market, and mounting geopolitical tensions. Historically, that combination has proved particularly conducive to inflation remaining entrenched for considerably longer than policymakers anticipate.

Should this liquidity continue filtering into real assets, markets may find themselves confronting a second inflationary wave before the first has been fully extinguished. In such circumstances, the greatest risk would not be a slowing economy, but the prospect of interest rates remaining elevated for far longer than currently expected — or even the need for further tightening. It is precisely this possibility that remains one of the most underappreciated risks facing global markets today.

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