MARKET UPDATE - Why Inflation And Interest Rates Will Decline In The Long Run

As always, there is plenty of noise about the potential for short-term inflation from tariffs, fiscal stimulus from tax cuts, and deficit spending from various governments around the world.

But the long-term trajectory of global inflation is poised to be significantly suppressed by three potent macroeconomic forces:

1. Minimal money supply growth

2. Slowing population growth and aging demographics

3. The transformative impact of artificial intelligence and automation

While short-term factors often dominate current price trends, these three structural shifts are coming together to fundamentally restrain both the demand-side capacity for price increases and the cost-push necessity for them.

As such, our long-term macro outlook remains the same. While we can’t predict any particular quarter or year, we are persuaded that the overall trajectory will be toward slower GDP growth, lower inflation, and lower interest rates.

1. Minimal Money Supply Growth

Like everything in economics, inflation is fundamentally a function of supply and demand. When overall demand exceeds overall supply, there will be resulting price increases in some goods or services.

In other words, inflation comes from “too much money chasing too few goods [and services].”

And one of the primary elements of demand is the money supply, because the money supply is a proxy for the aggregate purchasing power in circulation.

When growth in the money supply is low, it likewise suppresses the growth in the aggregate purchasing power of businesses and consumers, which in turn tends to keep inflation low. On the other hand, when money supply growth is high, it means that the aggregate purchasing power is rising rapidly, which typically facilitates price increases.

More specifically, what matters is growth in the money supply faster than growth in the production of goods and services.

Generally speaking, the more money is in circulation in the economy, the more capacity businesses and consumers have to bid up prices. So if output is relatively stable, big swings in the money supply (usually to the upside) can have big effects on inflation.

That’s what happened in the post-COVID period as the gargantuan amount of emergency money creation filtered through the economy, giving American businesses and consumers the capacity to bid up prices.

Data by YCharts

But notice that over the last several years, growth in the money supply has been well below average, even dipping into contraction in 2023-2024. It has now returned to modest growth, but that growth rate remains below its trailing 20-year average level.

In short, one of the biggest factors in inflation simply isn’t a factor right now.

As long as growth in the money supply remains under control, growth in the general price level should likewise remain low.

2. Peak Populations & Aging Demographics