We have found that the correlation relationships between various types of credit and inflation are variable over time. So far, the kinds of credit studied are government spending,1 consumer credit,2 and mortgage debt.3 Here, we address another category of credit spending, Nonfinancial Corporate Credit. This series studies the correlation between Nonfinancial Corporate Credit and CPI inflation.
Image by THAM YUAN YUAN from Pixabay.
Introduction
In this project, we examine the correlation between changes in non-financial corporate (NFC) credit and changes in inflation as measured by the Consumer Price Index (CPI4). The Federal Reserve data for NFC credit (1951-2022)5 is the credit data for this study.
The hypothesis we are testing is that inflation depends on consumer credit in a linear manner, expressed in the following equation:
I = mS + b
where
I = Change in CPI (the Consumer Price Index)
S = Change in NFC Credit
The two constants, m and b, define the relationship of y, the dependent variable, to x, the independent variable. By writing the relationship in this way, we imply that CPI (y) depends on NFC credit (x). But this is a mere formality because the equation can be rearranged:
S = m’ I + b’
where
m’ = 1/m
b’ = -b/m
There is an equivalent equation implying that NFC credit depends on inflation without affecting results and conclusions.
Data
The organization of the data is similar to the federal deficit spending and consumer inflation study.1 The inflation time series has periods of inflationary surges, deflationary surges, and years when inflation/disinflation/deflation have trends with <4% change uninterrupted by countertrend moves >1.5%. The three types of inflationary periods from 1952-2022 are in Tables 1-3. For the definition of the various periods, see “Government Spending and Inflation: Reprise and Summary”.1
Table 1. Periods of Significant Increases of Inflation 1952-2022
Table 2. Periods of Significant Decreases of Inflation 1952-2022
Table 3. Periods without Significant Inflation Trends 1952-2022
Inflation Measured Quarterly
The definition of inflation above is done annually. Here, we use inflation data reported quarterly; see Appendix 2. The previous work,4 using annual data, produces the inflation time series graph shown in Figure 1.
Figure 1. CPI Annual Inflation 1914-2022 with Significant Changes in Inflation Noted
(Each letter identifies the end of a significant move.)
The data in Figure 1 produced Tables 1-3.
Figure 2 shows the rolling four-quarter inflation using the quarterly data used in this study. This results in four times as many data points for 12 months of inflation over the same 109 years.
Figure 2. CPI Rolling Four Quarter Inflation 1914-2022
There is much more structure in Figure 2 than in Figure 1. This may reflect noise in the Figure 2 data or be real information. The only area where this question may have importance could be the three peaks from 3Q 1917 to 1Q 1920. In Figure 1, this time period shows only a single peak with a shoulder approaching 1920. Addressing this question has no bearing on the current study, which covers the 71 years 1952-2022.
Figure 3 displays the inflation data for the study period 1952-2022.
Figure 3. CPI Rolling Four Quarter Inflation 1952-2022 with Significant Changes in Inflation Noted
(Each letter identifies the end of a significant move. An * identifies the end of an insignificant time period.)
A summary of the data in Figure 3 is in Table 4.
Table 4. Timeline of Inflation Data 1952-2022
The quarterly data displays more information than the yearly data used previously.
- Table 4 has eight periods with positive inflation surges for the 70-year period. The previous study defined only 5.
- There are five negative inflation surges in Table 4, one more than in the previous study.
- There are also five time periods with insignificant inflation changes in Table 4, while the previous study had only 3.
- Significant inflationary periods are identified here for 2006-08 and 2009-11 with the quarterly data. A significant deflationary period was identified for 2008-09.
- There were 3 1/2 years 1983-86 with no significant inflation changes that were not identified previously.
Note: 1999-2020 was previously identified as a 22-year period with no significant inflationary trends. The quarterly data found two significant inflationary trends and one significant deflationary trend within the interval.
Using the quarterly data gives a better resolution of inflationary and deflationary periods than was obtained with the annualized data. Whether or not this is useful remains to be seen with further analysis.
Comparing Nonfinancial Corporate Credit Growth to Inflation
The determination of the credit growth rate by calendar year quarters is shown in Appendix 1. A table for comparing credit growth with inflation is constructed below from that growth rate data. For convenience, Household and Nonprofit Organization Credit is abbreviated HNO Credit below.
We use the Consumer Price Index (CPI) to calculate the inflation rate, as was done in the previous study of federal deficit spending.1 However, the data here for inflation growth is organized by calendar year quarters, as shown in Appendix 2.
Table 5. NFC Credit Growth and Inflation (CPI), Coincident Data, 1952-2022*
Table 6. NFC Credit Growth and Inflation (CPI), NFC Leads by 3 Months, 1952-2022*
Table 7. NFC Credit Growth and Inflation (CPI), NFC Leads by 6 Months, 1952-2022*
Table 8. NFC Credit Growth and Inflation (CPI), NFC Leads by 9 Months, 1952-2022*
Table 9. NFC Credit Growth and Inflation (CPI), NFC Leads by 12 Months, 1952-2022*
Table 10. NFC Credit Growth and Inflation (CPI), NFC Leads by 18 Months, 1952-2022*
Table 11. NFC Credit Growth and Inflation (CPI), NFC Leads by 24 Months, 1952-2022*
Table 12. NFC Credit Growth and Inflation (CPI), NFC Lags by 3 Months, 1952-2022*
Table 13. NFC Credit Growth and Inflation (CPI), NFC Lags by 6 Months, 1952-2022*
Table 14. NFC Credit Growth and Inflation (CPI), NFC Lags by 9 Months, 1952-2022*
Table 15. NCF Credit Growth and Inflation (CPI), NFC Lags by 12 Months, 1952-2022*
Table 16. NFC Credit Growth and Inflation (CPI), NFC Lags by 18 Months, 1952-2022*
Table 17. NFC Credit Growth and Inflation (CPI), NFC Lags by 24 Months, 1952-2022*
Analysis
The first thing to notice about this data concerns the complete lack of patterned structure. Figure 4 shows that the NFC Credit and CPI Inflation timeline variations show no consistent correlations. Over the long 71-year time frame, the two patterns seem to follow largely independent paths. This is true for most changes over a few quarters and for all long-term trends.
Figure 4. Quarterly Changes – NFC Credit and CPI Inflation 1952-2022
A scatter plot of the quarterly data with coincident timelines for the two variables (Figure 5) indicates a low correlation ( R2 = 4.3%, R = 20.7%). This data shows a desirable oval football shape6 for the data points, so the result should be considered reliable.
Figure 5. Scatter Diagram for NFC Credit – CPI Inflation Data Pairs 1952-2022, Coincident Timelines
We see no potential for useful correlation analysis in the entire data set. Further work will study what happens with the analysis of shorter time periods within the 71-year time frame.
Conclusion
The fine data granularity (more than 280 data point pairs) may provide useful information when analyzing various time periods. We will look at the time periods for each of the three inflation behaviors shown in Table 4. As done before,1,2,3 timeline shifts will be examined to see if any information can be determined about possible cause-and-effect relationships. The next step in this process will be to analyze the positive inflation surges during the time interval 1952-2022.
Appendix 1
The Household and Nonfinancial Corporate (NFC) Credit data is from the Fed database.5 The table below shows the conversion of the Fed data to growth rate by quarter.
Table A1. Growth Rate of NFC Credit 1952-2022* (Quarter-over-Quarter)
Appendix 2
The Consumer Price Index (CPI) data is from the Fed database.4 The table below shows the conversion of the Fed data to growth rate by quarter.
Table A2. Growth Rate of CPI 1913-2022* (Quarter-over-Quarter)
Footnotes
1. Lounsbury, John, “Government Spending and Inflation. Reprise and Summary”, EconCurrents, August 20, 2023. https://econcurrents.com/2023/08/20/government-spending-and-inflation-reprise-and-summary/.
2. Lounsbury, John, “Consumer Spending and Inflation. Part 4., EconCurrents, September 23, 2023. https://econcurrents.com/2023/09/23/consumer-credit-and-inflation-part-4/.
3. Lounsbury, John, “Mortgage Debt and Inflation. Part 4., EconCurrents, October 22, 2024, 2023. https://econcurrents.com/2023/10/22/mortgage-debt-and-inflation-part-4/.
4. Federal Reserve Economic Data, Consumer Price Index for All Urban Consumers: All Items in U.S. City Average, Index 1982-1984=100, Monthly, Not Seasonally Adjusted. https://fred.stlouisfed.org/graph/?id=CPIAUCNS.
5. Federal Reserve Economic Data, Nonfinancial Corporate Business; Debt Securities and Loans; Liability, Level, Billions of Dollars, Quarterly, Seasonally Adjusted. https://fred.stlouisfed.org/series/BCNSDODNS.
6. Freedman, David, Pisani, Robert, and Purves, Richard, Statistics, Fourth Edition, W.W. Norton & Company (New York) and Viva Books (New Delhi), 2009. See Chapters 8 & 9 to explain how normal distributions relate to determining correlation coefficients. See p. 147 for a discussion of football-shaped scatter diagrams.
