I've seen a number of bloggers recently post a chart of M2 such as this one from Scott Grannis at Calafia Beach Pundit:

Mr. Grannis then says:

Without a huge increase in the actual amount of money in the economy, we are unlikely to see a huge increase in inflation. Alternatively, a significant decline in the demand for money could support a rise in the price level, but there is no evidence to date that this is occurring (except for the fact that the dollar is trading at record lows).

I have the greatest respect for Mr. Grannis and often link his posts here at RCM, but isn't the dollar trading at record lows enough evidence that demand for the greenback has dropped significantly? How about $1500 gold? $45 silver? What is inflation anyway? The CPI is an attempt to define a basket of goods against which to measure the value of the dollar. If CPI is rising, it means the dollar is falling in value. If CPI is falling, it means the dollar is rising in value. The CPI is nothing more than a non-market, alternate means of valuing the dollar.

And why wouldn't the demand for Dollars drop? A series of Treasury Secretaries have told the world we have a strong dollar policy while also complaining that the Chinese won't let their currency rise. Isn't that the same as saying we want the dollar to go down? After nearly a decade of telling the world we want a cheaper dollar, they appear to have gotten the message. Nobody wants to hold dollars when the Fed and the Treasury are doing everything in their power to make them less valuable. There's a reason so many emerging markets are complaining right now about excessive capital inflows.

Call me crazy but I'll take a market based indicator over a government calculated one any day. It is true that a temporary drop in the value of the dollar might not show up in the basket of goods known as the CPI, but the decline of the dollar isn't new or temporary. It has been going on pretty steadily since 2002 and shows no sign of stopping anytime soon. Inflation is happening right now and we know that because the market price of the dollar is falling. Waiting for the CPI to register the effect is just hoping the market is wrong.