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As UK inflation goes up, bank buries its head

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(Read caption) The Bank of England may say that rising value added tax (VAT), a weak pound, and the rising cost of global commodities are causing inflation. But even if those issues fade away, inflation won't.

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So, inflation is up again this month, hitting 4 percent on the CPI measure and rising above 5 percent on the RPI measure. I expect the Bank of England will stick to their story that this is the result of the VAT rise, global commodity prices, and the weak pound. And in an immediate sense, they may be right.

After all, if you want to know about real inflation, you should be looking at the money supply rather than at price indices. And here, although broad money (M4) growth picked up in the final quarter of 2010, it remains relatively weak.

But the Bank is burying its head in the sand if it thinks that inflation is going to go away once external factors fade. Quantitative Easing has led to a quadrupling of the monetary base, and as Andrew Lilico has pointed out:

Under normal circumstances, one would expect the result of such a huge expansion in the monetary base to be a similar expansion in the broader money supply, and consequently a large rise in the price level (if it were all to occur in one year — which it wouldn’t — we’d be talking 300% inflation).

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