Measuring Inflation Through Bank Deposits

Inflation is commonly discussed in terms of rising consumer prices, but this approach can obscure the underlying driver: the expansion of money in the economy. Prices reflect inflation, but they are not a precise measure of it. I take a different approach—measuring inflation directly through the growth of money in circulation, specifically commercial bank deposits.

Why Bank Deposits

I use the Federal Reserve’s Deposits, All Commercial Banks (DPSACBW) series as the core measure. This series tracks the total deposits at U.S. commercial banks, including checking, savings, and time deposits. It represents money that has actually reached households and businesses—money that can be spent, lent, or invested.

Unlike price indexes, DPSACBW reflects monetary expansion itself, rather than adjustments for substitution, quality, or other statistical treatments. It aligns with the monetarist definition of inflation: the growth of money supply driving economic activity and prices.

https://fred.stlouisfed.org/series/DPSACBW027SBOG

The Two-Stage Framework

I measure inflation using a two-stage framework:

1. Potential Monetary Expansion
   Central bank balance sheets, bank reserves, and government deficits indicate the future supply of money. At this stage, the liquidity exists in the system but has not yet entered the economy.

2. Actual Money Circulation
   DPSACBW captures deposits in the banking system—the money that has reached the real economy. This is the stage that creates inflationary pressure in assets, goods, and services.

Inflation, in this framework, is mainly tied to stage two: the expansion of deposits that can be spent or invested.

Historical Context

Looking at yearly DPSACBW data illustrates how this works in practice:

• 1973: ~$0.66 T

• 2000: ~$4.7 T

• 2010: ~$8.3 T

• 2020: ~$16.2 T

• 2025: ~$18.7 T

These long-term trends show the systemic growth of money in the economy. Periods of rapid deposit growth, such as post-2020, indicate strong inflationary potential, while slower or declining growth signals moderation.

Why This Method Works

• Direct measure of liquidity: Instead of relying on price indexes, I track money that is actually available to the economy.

• Filters noise: Monthly fluctuations can be ignored; trends over quarters or years provide meaningful signals.

• Accounts for lag: Policy liquidity can sit in reserves for years before becoming deposits. DPSACBW measures money that has already reached the private sector.

• Predictive value: Large-scale deposit growth correlates with both asset inflation and future price pressures.

Summary

By measuring inflation through DPSACBW, I focus on the monetary forces behind price changes, separating potential liquidity from money already in circulation. It is not about short-term movements but tracking large-scale, systemic trends that drive real inflation. This method provides a clearer, more direct view of inflation than conventional consumer price indexes.