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Money's misleading message for inflation

The big rise in the money stock might not cause much inflation, but higher interest rates instead.
Money's misleading message for inflation

“Inflation is always and everywhere a monetary phenomenon.” If Milton Friedman’s famous line is right, we’re headed for rising inflation.

The Bank of England estimates that the M4 money stock – the bank deposits held by the non-bank private sector – has risen 13.6 per cent in the past 12 months, the fastest rate since 2006. Because of this Tim Congdon at the University of Buckingham and colleagues have warned that we could see inflation top 5 per cent at some time in the coming years.

Certainly, there is precedent for faster monetary growth to lead to rising inflation: we saw just this, for example, in the late 1980s. Equally, though, there are cases of it not doing so. Accelerations in monetary growth in the mid-1990s and mid-2000s didn’t lead to significant inflation.

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