Inflation is never and knowwhere a monetary phenomenon

Inflation rose to its highest level in more than two years, climbing by 1.2% compared to a year earlier. Perhaps more importantly with annual rates of producer price inflation rising at the fastest pace in more than four years, many analysts are now estimating the inflation will rise to 3% before the end of 2017. With matching wage increases highly unlikely, associated living standards are going to take a real hit. Some are forecasting that wage growth may fall into negative territory during the same period as the benefits of a weaker pound are being overstated.

Not priced into these forecasts is the prospect of steeply rising oil prices. On Monday oil prices rose by as much as 6.5 percent to an 18-month high after OPEC members and some of their rivals reached a first deal since 2001 to jointly reduce output to try to tackle global oversupply and boost prices.

In the face of potential rampant inflation the question is what does the Bank of England do? There are some voices who have been warning about large scale inflation for decades (or more). Then there are others who started warning about it just as dramatically from 2009 (QE interventions) onwards. The appropriate course of action being to jack up interest rates to double digits. However, with falling living standards and demand this would result in economic catastrophe.

The mantra that Inflation is always and everywhere a monetary phenomenon has been debunked, it could be argued, by the events of the last 8 years. The massive increase in the money supply through global QE policies not only did inflation not happen, it was deflation that became the critical problem.

In the case of the UK the cause of this spike in inflation is the vote for BREXIT. It is not because of an increase in the money supply. There is not too much demand for two few goods. There is no bottleneck in the supply chain.

It is imperative that if we are going to see a marked change in inflationary expectations we need to understand it probably has very little to do with the money supply and that increasing interest rates will only exacerbate the problem.