Concentrate on Growth and Inflation
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For Immediate Release.
Congdon argues that analysis of the money supply went out of fashion in the last decade. However, the indisputable relationship between money and inflation continues. Year-on-year, decade after decade money supply has increased a little faster than the rate of increase of nominal GDP. Any excess monetary growth feeds into inflation. The maximum allowable growth in the money supply should be 6-7% per year, if inflation is to remain on target.
Current money supply growth is outside that range. Leading indicators of money supply growth suggest that it will rise to over 10%. In the short run this may boost demand and output but, in the medium term the Bank of England’s inflation target is under threat.
The MPC assesses the prospects for inflation by looking at everything- world stock markets, bond yields, the labour market and even immigration. They are in danger of ignoring the one thing that matters money. A close examination of the trends in monetary growth should form the core of the MPC’s work.
Read the full paper here.