Recently, I posted about the current fall in M4 lending in the UK. The concern is that fears over possible future inflation are preventing decisive action to promote economic recovery. But, these fears are misplaced. The fall in M4 lending in the UK is a sign of a fundamental weakness in demand. Given this weakness, …
Readers Question: Can there be economic growth without an increase in the money supply? Can there be growth with zero inflation? There can be economic growth with zero inflation. This could occur if there was improvements in productivity, which caused lower costs and higher output at the same time. If you take a particular sector …
Readers Question: 1. I read somewhere that accommodative monetary policy (in other words, quantitative easing) does not automatically result in higher inflation. For higher inflation to occur, the output gap must be crossed. i.e. idle factories back in business, unemployment rates down, etc. However, I don’t think the hyperinflation in Zimbabwe was preceded by increasing …
For the past several months, the governor of the Bank of England has had to write a letter to the Chancellor explaining why UK inflation has been above the government’s target of 1-3%. April 2012 gives the first on target inflation figure (1-3%) since Dec 2009. Core inflation which strips out energy and food has …
Inflation in the UK remains relatively high given the state of the economy. It continues to be above the Bank of England’s target of 1-3%. However, the MPC will not be overly concerned about inflation. They are more worried about the weak prospects for economic growth and will be ‘hoping’ / predicting inflation will continue …
Readers Question: Does low inflation always mean low-interest rates? Generally low inflation will lead to low-interest rates. Although in practice there may be some divergence. The UK has an inflation target of CPI = 2%. Therefore, interest rates are used to achieve this target. If inflation falls to below 2% the MPC will cut rates …
Readers Question: Does money printing/QE always lead to inflation and price increases? No. Increasing the money supply does not necessarily cause inflation. In particular, we have seen a large increase in the monetary base (narrow money) that hasn’t led to an increase in the general price level. If you look at link between money supply …
In September 2011, CPI inflation rose to 5.2%, well above the government’s inflation target of 2%. RPI inflation is even higher at 5.6% Why have the Bank of England kept interest rates at 0.5% despite this increase in inflation? Should we not be more concerned about inflation? Price indices and inflation ONS Reasons To be …