In the July issue of the Elliott Wave Theorist, Robert Prechter introduced the proper measure for inflation adjusting – that is, by money and credit – and he named it MAC. We now extend MAC into a measure of inflation and deflation – the Money and Credit Index – or MACI (pronounced MAC-ee).

Turning to the USA first, our inputs for MACI include money supply, as measured by M2, and total debt outstanding, as calculated in the Federal Reserve’s Z.1 report titled Financial Accounts of the United States. We turn these inputs into an index as shown below, together with its year-on-year rate of change.

The index uses March 1959 as a base date (100) and the black line shows the seemingly inexorable increase in money and credit since then. The year-on-year rate of change for MACI has always been above zero, indicating inflation. However, the inflation has occurred at differing speeds. What is striking though, is that MACI has been generally disinflating (inflating at a slower rate) since the 1950’s. The disinflation trend really picked up in the mid-1980’s with the annual MACI rate falling from 3.07% in 1985 to just 0.57% now. The long-term trend is clearly towards deflation.

In fact, if the Fed is still wondering why the Consumer Price Index is growing at a slower rate than they think it should, perhaps they could look at MACI.

The chart above shows that the large disinflation of MACI started in September 2016, before the year-on-year change in CPI topped out in February this year. Is there a relationship between MACI and CPI? The chart also shows that consumer prices bottomed out in 2015 before money and credit started inflating at a faster rate, so it may not always be the case that MACI leads CPI. However, our chart below shows that, from 1990, there were a few occasions that MACI did act as a lead indicator of CPI, notably the disinflation in the early 1990’s and the reflation in the early 2000’s.

In fact, you could say that MACI provided a lead indicator of the Great Financial Crisis in 2008. The inflation rate of MACI topped out in 2004 at 1.94% and was disinflating rapidly as the crisis approached. In other words, although money and credit were still abundant in terms of levels, the rate-of-change was showing signs of tightening conditions before the dash for cash began in earnest.

Although there is clearly a link, the fact that there is not a perfect symbiotic relationship between MACI and CPI does not bother us, because they are measuring two different phenomena. CPI measures the increase or decrease of prices. MACI measures the inflation or deflation of money and credit. Our Quantity Theory of Money (QTM) article provides an explanation of the relationship between money and prices, but we know that QTM is not perfect.

CPI does not measure inflation or deflation; it measures the increase or decrease of prices. Our aim in developing MACI is to have a benchmark measurement for inflation and deflation in an economy.

MACI for Other Countries

We can extend MACI, our preferred measurement of inflation and deflation, to other countries, and we present the charts for UK, Germany and Japan below. Our inputs include money supply, public and private sector debt.

Having experienced two bouts of deflation since 2010, the UK is currently inflating at 1.64% annualized.

Germany has been on a disinflationary trend since 2015 and annual inflation is running at 0.86%

Japan’s inflation rate has been steady with a slight disinflationary skew since 2010. The current rate is 1.71%.


We have become conditioned to thinking of the rise and fall of in an index of consumer prices as inflation and deflation. This is wrong.

Inflation is an expansion of money and credit in an economy. Deflation is a contraction of money and credit.

Our Money and Credit Index (MACI) gives a clear, consistent, true measure of inflation and deflation.

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