Inflation Rates in UK

Readers Question. I have read that in the US (and to some extent in the UK) the money supply has been increasing for a number of years , which was a contributing factor in the ‘credit/asset price bubble’ story. Why did inflation stay so low in this period of expanding money supply?

The link between the money supply and Inflation  is often weak. In theory, an increase in the money supply faster than an increase in Real Output growth will cause inflation, but there are many other variables to take into account such as the Velocity of circulation V (number of times money changes) hand. Therefore, a rapid increase in money supply might not cause inflation.

These help give more answers:

• Link Between Money supply and inflation
• Money Supply and Inflation in US

Latest UK Inflation Figures

Source: BBC

• RPI inflation is now – 1.2%
• CPI Inflation is now 2.3%

The large rise in unemployment and effects of recession are likely to cause CPI inflation to fall further.

If the Pound recovered against the dollar and Euro, this would also reduce inflation further.

Latest Inflation report at Bank of England