The purpose of this particular paper is to analyze the impact of the money supply on consumer price indexes within the U.S. The intent of this paper is to probe the impact of the M1 and M2 money supplies on consumer and producer prices indexes by estimating a multitude of equations taking core CPI, general CPI, core PPI, commodity PPI, and personal consumption expenditures as a measure of inflation, with M1, and M2 money supply, as explanatory variables. For this analysis, the OLS technique is used to cover time series data from 1980-81 to 2009-10. The results for general CPI, core CPI, core PPI, and PCE, show a positive correlation with the M1 money supply. Commodity PPI however, is negatively correlated with M1. General CPI, core PPI, commodity PPI, and the PCE are positively correlated with M2. Results show that only the cores CPI, general CPI, are positively correlated with the M3 money supply. It may be concluded that the supply of money M1 and M2 affect the core and general price indices in the same way. The central question that this paper attempts to answer is: Do the domestic money supplies have the same effect on both general pricing indexes as they do on the core pricing indexes? The most important revelation within this project is that the M1 money supply affects general CPI stronger than the core CPI, thus contradicting the analysis posited by the equity research analysts on Wall Street.
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