Monday, 21 May 2007

More money, more inflation

I think that there is something in this money supply thing. Today, the Bank of England announced that last month the money supply increased by 1.4 percent. For the year as a whole, the amount of money circulating in the UK increased by 13.3 percent. It is a simple enough idea; lots of money creates lots of inflation.

There is another interesting point that the Bank of England should remember. Creating more money today doesn't cause more inflation today, but it does with a lag of about 18 months. So, there is plenty of inflationary pressure building up in the UK economy that should keep prices rising for at least another year and a half.

What does this means the housing market? If the Bank of England is serious about reducing inflation, then it is going to have to raise interest rates again. How does a base rate of 7 percent sound? It sounds a little far-fetched at the moment, but the money supply is growing rather quickly, and so far 5.5 percent has done nothing to slow it down.

3 comments:

Dennis said...

I love this blog, it is like a trip down memory lane. It is pure unreconstructed monetarism. It is the sort of thing that died out around 1985 but still lives on with you, Alice.

BTW, I have this sneaky feeling that your are Mrs T writing under a psuedonym.

Anonymous said...

MV=PY

Ben said...

It wouldn't be so scary if the Bank of England's own economists knew where the demand for all this extra money was coming from, but, by their own admission, they don't.

We can probably live without monetary targets per se, but as has been said elsewhere, an inflation target based on an index with its roots in reality would be a real good start...