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Good Politics, Bad Economics. Inflation and the Autumn Statement

The Chancellor in his Autumn statement made a great deal of the government’s pledge to halve inflation. But, says John Greenwood, the government, the Bank of England and the OBR have all made mistakes that could have been avoided if they had paid attention to the rate of growth of money. Every episode of sustained and substantial inflation in the UK has been preceded by a surge in money growth, as happened in 2021. Inflation is clearly going to fall well below target in 2024, and we may even have deflation in 2025.

The declarations about inflation by Jeremy Hunt and by HM Treasury in the Autumn Statement may seem to be good politics, but, notwithstanding the OBR’s blessing, the underlying economics are highly questionable.

From the government’s side we have:

  • ‘The government must continue to bear down on inflation, and the Office for Budget Responsibility (OBR) forecasts that government policies in the Autumn Statement will reduce inflation next year.’
  • ‘Reducing debt and borrowing is essential to controlling inflation.’
  • ‘Inflation is less than half its peak. Responsible decisions taken by the government to limit borrowing have supported the Bank of England in its action to bring inflation down.’
  • ‘With inflation falling and the economy and public finances stabilised after a series of unprecedented shocks, the government can now take the long-term decisions necessary to strengthen the economy and build a brighter future.’

Together these statements and other similar expressions by senior government officials suggest that (A) the government has some degree of control over inflation and has played a part in reducing it, (B) the debt level is relevant to inflation, and (C) the outlook has improved after a rocky period that resulted from a series of external shocks.

Unfortunately for the Tory party and its leadership, every one of these propositions is dubious at best, and in some cases demonstrably false.

Similarly, the OBR’s inflation outlook is highly questionable, based as it is on a methodology that, like the Bank of England’s, omits inflation’s ultimate source. In the OBR’s  170-page ‘Economic and fiscal outlook’, inflation is mentioned 253 times; but money, the money supply, and M4x are not mentioned even once!

  • Instead, the OBR’s report has key sections (pp. 18-26 including Box 2.2, ‘The source of inflation and its fiscal consequences’) which concentrate on the demand-side and supply-side impacts of the government’s fiscal measures, with a degree of ‘output gapology’ thrown in.
  • But the factors that command the OBR’s attention – energy prices, second-round effects, and economic slack — are all coincident or lagging indicators of a transmission process that was well under way before the Russian invasion of Ukraine.
  • Essentially, the OBR is reporting how the transmission of inflation is working itself out among different sectors of the economy and claiming that these factors (food, energy, tradables, non-tradables, their Chart 2.4) are the drivers or ‘sources’ of inflation. They are not.

To drive the point home, consider the OBR’s Chart B in Box 2.2 (p. 25). The chart (reproduced at the top) shows how, as late as October 2021 the OBR – along with the Bank of England, it should be said – was forecasting inflation to be a temporary or ‘transitory’ blip and that it would soon return to the 2% target (see the green line). Even in March this year they forecast a steep fall, essentially reversing much of the previous surge in inflation by falling below the green line and converging back towards 2% from zero in 2026 (observe the yellow line). The latest forecast (in blue) shows inflation falling later than previously thought, declining temporarily below 2% but converging on 2% in 2027 (‘averaging 2.1 per cent between 2024 and 2028’, p.24).

As a monetary economist my reaction [] has been one of dismay. The government, the Bank and the OBR have all made mistakes which were entirely avoidable if they had just done one thing: paid attention to the rate of growth of money, specifically M4x. What has happened to the OBR’s blue line was predictable, and their forecast would be substantially improved if they took into account recent trends in money growth.

Table 1. Every Episode of Inflation in the UK has been Preceded by Rapid Money Growth.

PM/Chancellor or BOE Governor & events Dates for Money Growth M4 Growth Rate

(quarterly data; average % change over previous year)


(Retail Price Index, average % annual change, starting one year later, and ending one year later than M4 growth)


(Retail Price Index, average % annual change, starting two years later, and ending two years later than M4 growth)

Alec Douglas-Home & Reginald Maudling, then Harold Wilson 1964 Q1 to 1967 Q2 8.4% 3.7% 4.0%
Harold Wilson;

Pound devalued

1967 Q3 to

1968 Q3

11.4% 5.6% 5.6%
Harold Wilson 1968 Q4 to 1970 Q4 7.5% 7.6% 8.2%
Edward Heath & Anthony Barber;

1st Oil Crisis

1971 Q1 to

1973 Q4

19.5% 10.8% 16.4%
Jim Callaghan, then  Margaret Thatcher 1978 Q1 to

1982 Q4

16.2% 11.3% 9.6%
Margaret Thatcher & Nigel Lawson;

2nd Oil Crisis

1986 Q1 to 1990 Q4 16.5% 6.4% 6.4%
Gov. Andrew Bailey 2020 Q1 to 2021Q4 9.3% 7.8% 10.8%


The truth is that every episode of sustained and substantial inflation in the UK has been preceded by a surge in money growth, and that’s exactly what happened in 2020-2021 (Table 1), though fortunately the money growth was not as egregious as successive British governments had presided over in the 1970s and 1980s. Note in Table 1 how long the lag is between the surges in money growth (column 3) and the impact on inflation —  typically at least one year (column 4) or two years (column 5). This is why it is superficial  for the OBR or the Bank to talk about energy prices or food prices driving up inflation, and meaningless to talk about controlling ‘second round effects’ or ‘managing expectations’. If these were important in controlling inflation, why does the rate of money growth as much as two years earlier have such a strong and consistent impact?

Conversely, every episode of relative calm on the inflationary front has been associated with lengthy periods of low and stable money growth (Table 2).

Table 2. Periods of Low Inflation have been Preceded or Accompanied by Low and Stable Money Growth.

All data shown as % year-on-year changes Average Money Growth Av Nominal GDP Growth Peak Inflation Rate Average Inflation


The Great Moderation M4 +7.0% p.a.


5.0% p.a.


RPI 4.8%

March 2007*

CPI 1.9% p.a.




M4x +4.5% p.a.


2.5% p.a.


CPI 3.1%

RPI 4.1%

Nov 2017*

CPI 1.4%

RPI 2.5%



Surely the lesson is obvious. If we want to know what is going to happen to inflation, we must check out what has been happening to money growth. This can be done in a number of ways, but here I have chosen just two.

First, let’s look at the level or supply of money and its relation to spending or nominal GDP in the following chart.

Chart 1. Spending follows money.



Before the onset of Covid, money (in black) and spending (or nominal GDP in red) were tracking each other, growing at similar, mid-single digit rates (4-7% p.a.). This was what gave us low and stable inflation through much of the post-GFC period. But when Covid struck, the economy was abruptly shut down, and the Bank of England created a huge amount of additional money by buying gilts in the open market and making corresponding payments of new money to the sellers, pumping  up the money supply. We know from Tables 1 & 2 that it takes up to two years for money growth to be reflected in inflation (the nominal part of nominal GDP), so it was natural that spending (including inflation) in Chart 1 should eventually catch up to M4x.

There are two observations to be made. (1) Compare the shape of M4x in the chart above with the actual inflation recorded in the right-hand panel of the OBR’s chart B. The similarity is not a fluke. Tables 1 & 2 tell us that inflation follows money growth. It is therefore bizarre that nowhere in all their ponderous analysis do the OBR boffins even mention money. And their analysis of the ‘sources’ of inflation is nothing more than a description of how the transmission process (goods prices rising first, service prices and wages catching up later) is operating. Any monetary economist could have told you – as we did Letter: Lurches in money sup­ply are proven Brit­ish men­ace ( – in 2020 what was going to happen to inflation in 2021 or 2022. But the Bank and the OBR have been in persistent denial.

(2) The re-convergence of M4x and nominal GDP is going to occur very soon. It has been brought forward by the sharp downturn in the level of M4x (dashed black arrow in Chart 1) resulting directly from the Bank’s decision to conduct QT (disposal of its gilt portfolio) at the rapid pace of £80 billion in the year to September 2023, recently raised to £100 billion for the year to September 2024, at the same time as raising Bank rate from 0.1% to 5.25%. The decline in M4x will start impacting the economy and then inflation as soon as the excess money balances created in 2020-22 have been run down. This means that the inflation process will come to a stop very quickly in 2024, and threaten deflation in 2025 if the monetary contraction continues.

This is why the OBR forecast is so out of touch with what is really behind the decline of inflation.

Chart 2. Inflation follows money growth with a lag of about 18 months.

Second, let’s look at what happened to the growth of money as a result of Governor Andrew Bailey’s decision in early 2020 to ‘Go big’, i.e., to conduct asset purchases (QE) on a very large scale. After all, he must have mused, since QE did not create inflation after the GFC, it would not do so in 2020 or 2021. But contrary to what happened a decade earlier (when broad money did not grow much beyond a subdued growth rate on account of the weakened condition of the banks in the early 2010s), this time the banks were in good shape and the result was an explosion in money growth – faster than anything since the Lawson boom of the late 1980s. In Chart 2, money growth has been shifted forwards by 18 months – a compromise between the 1-year and 2-year lags shown in Table 1 — to show the likely path of inflation over the next year or so.

On this simple basis, inflation is clearly going to fall well below target in 2024, and we may even have deflation in 2025 – a very different view from that expressed by either the OBR or the Bank of England. Having pushed too hard on the accelerator, the Bank is now pushing too hard on the brake.

Monetary contractions are very rare, but when they do occur, they invariably lead first to recession and then to deflation. For the government and the Tory party, the implications of the current monetary outlook could hardly be worse.


John Greenwood is the founder and Chief Economist of International Monetary Monitor Ltd, and was Chief Economist at Invesco, based in London, from 1999 to 2021. A pioneer of monetary research in Asia, he was the publisher, editor and lead author of Asian Monetary Monitor, a bi-monthly publication which operated from Hong Kong between 1977 and 1996.

John Greenwood

John Greenwood is the founder and Chief Economist of International Monetary Monitor Ltd, and was  Chief Economist at Invesco, based in London, from 1999 to 2021. A pioneer of monetary research in Asia, he was the publisher, editor and lead author of Asian Monetary Monitor, a bi-monthly publication which operated from Hong Kong between 1977 and 1996.

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