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How to Prevent Future Inflation: Lessons from the Covid Inflation

Andrew Bailey, Governor, The Bank of England

 

PRESS RELEASE        

                                        

A New Year’s Resolution for the Chancellor –  Think about Money Supply

 

PDF J Greenwood 29 December 2023 -How to Prevent Future Inflation

Immediate – 29 December 2023

For Britain’s government the number one economic priority remains to end the inflation that has brought misery both to families struggling with  he higher cost of living and homeowners who have faced rocketing interest rates.

But, says the monetary economist, John Greenwood,  in Politeia’s New Year publication, How to Prevent Future Inflation  Lessons from the Covid Inflation, the three main players – government, Bank of England and the OBR are on the wrong track. They have made mistakes’which could have been avoided had they paid attention to the rate of money growth. As Greenwood says:

every episode of sustained and substantial inflation in the UK has been preceded by a surge in money growth, and that is exactly what happened in 2020-2021 …  though fortunately the money growth was not as egregious … as … in the 1970s and 1980s.

Greeenwood says it is wrong to blame rising energy prices for higher inflation:

… Most people wrongly attribute those inflations  [of the 1970s] to the oil price hikes. …. [But]  the prior double digit increase in money was the reason for those episodes of inflation, not the oil shocks themselves. The same applies to 2022: if there had been no prior surge in money growth in 2020-21, energy prices might have risen, but overall inflation would have been restrained (as was the case in both Switzerland and China which did not allow prior surges in money growth).

Referring to the House of Lords Economic Affairs Committee Report, Making an Independent Bank of England Work Better,Greenwood suggests that even stronger action is needed.

  • The evidence is that moderate rates of broad money growth (M4x nowadays) are a sine qua non for meeting the inflation target.
  • The Chancellor’s mandate to the Bank should therefore specify the inflation target and a limited range for annual broad money growth.
  • The Governor of the Bank should be obliged to to report regularly to the Chancellor and Parliament not just on inflation – (where the Bank is ‘adept at blaming external shocks nstead of owning up to the Bank’s policy mistakes — but also on money growth to ensure that big deviations such as occurred in the early phases of Covid are prevented in future.
  • Only with specific, narrowly focused reforms of this kind can we hope to set monetary policy on a path to better future performance.

 

Notes to Editors

  1. How to Prevent Future Inflation: Lessons from the Covid Invlation, by John Greenwood, is published by Politeia, 55 Tufton Street, London, SW1P 3QL on Friday 29 Dec 2023.
  2. The author, 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.
  3. Established in 1995, Politeia is an independent, non-partisan think-tank providing a forum to discuss economic, constitutional and social policy with a particular focus on the role of the state in people’s lives.
  4. Contact: John Greenwood jggecon@gmail.com;   Politeia Press – press@politeia.co.uk
  5. Politeia’s earlier (April 2023) study,https://www.politeia.co.uk/wp-content/uploads/2023/04/Congdon.pdf by Professor Tim Congdon, CBE, Chairman IIMMR and associated with Buckingham University, called for greater accountability by the Bank of England, new limits on money growth in the Governor’s Open Letters and the automatic resignation of the Governor and Deputy Governor for monetary policy if there are overshoots or undershoots on the inflation target.

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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