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Currency in Circulation vs Consumer Price Index

Brian Legarth and Kenneth Hartzfeld

CPI is the weighted average of prices of a host of consumer goods, such as goods, services, transportation, and medical care. It is a general metric of the price that living costs. CPI is used in the calculation of changes in costs of living, and is an important teller of inflation and deflation.

The currency in circulation metric measures the total value of coins and cash bills that have ever been issued subtracted by that which the government has removed from circulation. Currency in circulation is a very small portion of the actual money being transferred in today's economy that is widely digital. Since the Great Recession of 2008, the Currency in Circulation has nearly doubled.

Both metrics are used to show inflation and deflation, but in terms of currency in circulation, the value has almost doubled over the last 10 years, while the CPI has only grown by about 20%. CPI seems to be the more accurate metric for inflation growth, as inflation hasn't doubled in the last 10 years.

19 thoughts on “Currency in Circulation vs Consumer Price Index

  1. Chris Surran

    I found it interesting that currency in circulation had almost doubled since the Great Recession so I went to Fred to see how currency in circulation has behaved in the past. In general, I found that currency in circulation (in a % change from previous year) seems to jump during recessions and then fall at the conclusion of the recession.

  2. spencerc20

    Currency in circulation doesn't seem like it'd be a very helpful metric in gauging how the economy is doing because it is simply how much paper money is out there. However, with the recession winding down, hopefully the currency in circulation should be falling and can be used as another sign that the American economy is on the rise again.

  3. Jack Ware

    I agree that in most cases CPI is a better indicator of inflation growth than currency in circulation. This post reminded me of a previous post on the correspondence of CPI and inflation. As I went back to the previous post I was able to observe FRED graphs closely detailing a mirror relationship between CPI and inflation. This paired with the fact stated that currency in circulation accounts for only a small portion of the actual money being transferred in today's economy gives support for CPI. This evidence furthered my assessment that CPI is a better indicator of inflation than currency in circulation.

    1. Evans Alison

      Jack, you make a good point here. The CPI is what measures the amount of money that a family spends to consume everyday goods where as the currency in circulation simply pertains to the amount of paper money in the economy. The currency in circulation misses a vast amount of the money flowing digitally from consumers to firms. The currency in circulation is an overstated indicator of inflation of the US dollar, which further proves your point that the CPI is a more accurate measure for inflation.

  4. myerse20

    This is a very interesting comparison of measures of the US/global economies. I don't quite understand why currency in circulation would be used nowadays at all to measure economies because as you mentioned, most transactions are digital. Would there ever be a time when this would be the best way to measure?

    1. radcliffec20

      EC, I think the only time when this would have been the best way to measure was when the gold standard was in effect. When backed by gold, currency represented the financial power a country possessed. Now, however, the argument has been made that paper currency is worthless since it can be printed at the government's will.

  5. Katie Paton

    It is interesting to see how CPI has steadily increased over the years, even with fluctuations in the economy. I never knew much about currency in circulation or that the government removed currency. It would be interesting to look at a graph that showed the effects of our digital economy on currency in circulation.

  6. bearupk20

    It will be interesting to see how currency such as Bitcoin will play into these measures as it grows in popularity, especially since Bitcoin fluctuates in value so often. I would be interested to see how this plays out as it becomes a more prevalent topic in our society and in our economy.

  7. Lauren Fredericks

    This is a very interesting comparison. Has CPI always been the more reliable metric for illustrating inflationary growth, or just in the last 10 years? In addition, I am curious why the currency in circulation metric has been skyrocketing so quickly recently while wages have leveled off or declined and the wage gap has expanded. Perhaps this growth largely reflects the increasingly richer upper class.

  8. the prof

    Do any of you use "currency" on a regular basis? I often go weeks on end without using cash, other than for tips at Lexington Coffee Shop.

    Indeed, 80% of currency in circulation consists of $100 bills, most of which are appear to be held outside the US. If the rest of the world is willing to sell us goods & services in return for paper with pictures of Benjamin Franklin, great! That's MUCH better than having to ship goods & services to them, as printing them uses almost no US labor or capital, which can therefore be devoted to more socially useful endeavors.

    1. Jimmie Johnson III

      I personally don't use currency on a regular basis as I find it much easier to use my debit card. However, I worked at Hollister over the summer and I was surprised as to how many people still use cash. While it may be easier for me as a young person to continually use my card, I believe older people still like to use cash. My mom always says she doesn't like cards because they make people unaware of how much money they really have. I think that is true because when I swipe my card i'm not concerned with the exact amount, I just know I have enough.

  9. hallk20

    It makes sense that currency in circulation has increased since the recession, as I seem to remember books mentioning that increasing currency in circulation is one way to combat recessions. I wonder if the government will begin to remove more currency from circulation now that the recession has ended, in hopes of decreasing inflation rates. It would be interesting to see if this would affect CPI, and to what degree this change would affect it.

  10. clintong20

    Although, I agree, CPI stands as a good measure to use to understand inflation and deflation amounts given a specific year but does that represent as a good measure for everyone? A college student, a veteran, etc...? Also, why does this "currency seem to leap so heavily? Very interesting!

  11. Cade Hornak

    I find it interesting that while traditionally I had learned that inflation naturally occurs as a result of printing too much new currency and putting it into the economy. However, clearly when the amount of currency doubles, inflation does not double as well. I would be curious to know what then drives CPI as that factor might result in inflation.

  12. moraifa19

    CPI is definitely a useful method for tracking inflation, but I also think that the currency in circulation has unique benefits as well. For example, governments who print tons of money to pay their bills know full well the hyperinflation they will cause. CPI is an after the fact method of testing inflation, where as currency in circulation can be more real-time, and can be prevented by not printing too much currency.

  13. bullr20

    Many countries still use physical currency over digital currency. I wonder if its has to do with psychology: perhaps it feels less risky to physically hold one's currency in their own hand as opposed to keep it in a bank. Perhaps countries with less credit sharing infrastructure or fewer constraints on the executive may be less inclined to keep their money on a little plastic card

  14. longa20

    I like how you build off of my post of inflation rates and CPI by adding in the factor of currency. It is interesting to note, however, that CPI minus Food and Oil is the best way to compare it to inflation.

    1. radcliffec20

      This is really interesting, especially considering how much money we, as individuals, spend on food and, as a country, on oil. Thanks for pointing this out!

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