Money growth must return to under 5% to bring inflation down to 2% a year, warn economists


Contact: Emily Carver, Head of Media, 07715 942 731

“Inflation is caused by excessive growth of the quantity of money. A return to money growth of under 5 per cent a year is a necessary condition of a return to on-target inflation of 2 per cent a year.” 

That was the message given today at a lunchtime presentation at the Institute of Economic Affairs by Professor Tim Congdon and Dr Juan E. Castañeda.  

Congdon and Castañeda – respectively chairman and director of the Institute of International Monetary Research at the University of Buckingham – argued that the current upturn in inflation can be explained by a marked acceleration in UK money growth since spring 2020, the current rate of which is 6.9 per cent after reaching 15 per cent in early

This acceleration has been the result mostly of the Bank of England’s purchases of gilt-edged securities (or “quantitative easing”). According to Congdon and Castañeda, these purchases were intended to sustain economic activity despite the damage from Covid-19, and to some extent they have had that positive effect. But – in their words – the gilt purchases also led to “double-digit and highly inflationary rates of money growth”.

Congdon and Castañeda recall the warning given in the 1970s by the Nobel laureate, Milton Friedman, that there are “long and variable” lags between money growth and inflation. They worry that, even if money growth fell to under 5 per cent a year in the near future, these lags “mean that 2022, and probably 2023, will see inflation in the 5 per cent – 10 per cent area.” In their view, bringing inflation back under control is a task for the medium term.

Congdon and Castañeda are the joint authors of the IEA’s June 2020 briefing paper Inflation: The next threat?. The paper correctly forecast that:

“By mid- or late 2021 the pandemic should be under control, and a big bounce-back in financial markets, and in aggregate demand and output, is to be envisaged. The extremely high growth rates of money now being seen – often into the double digits at an annual percentage rate – will instigate an inflationary boom.” 


Notes to editors

Contact: Emily Carver, Head of Media, 07715 942 731

IEA spokespeople are available for interview and further comment.

You can download a copy of the IEA paper ‘Inflation: The next threat?’ here.

The presentation will be available later this week on the IEA YouTube channel here.

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