After underestimating the risk of inflation and later running the risk of monetary policy overkill, is the Bank now on the right track?

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This was a good week for those of us who believe that inflation has something to do with too much money chasing too few goods and services. This simple idea is central to the work of the Institute of International Monetary Research (IIMR), based at the University of Buckingham, and to the regular discussions of the Shadow Monetary Policy Committee (SMPC) ([link removed]) hosted by the IEA.

Despite this, most commentators pay little attention to the money and credit aggregates. Even the Bank of England prefers to explain its policy of ‘quantitative easing’ (QE) as an ‘asset swap’ that lowers bond yields rather than ‘money printing’. But surely the clue is in the name – QE works, at least partially, by increasing the quantity of money.

The inflation data published last Wednesday is another example of why this matters. The headline measure was widely expected to jump in August due to higher fuel prices. In fact, it fell, which is consistent with the sharp deceleration in the growth of money and credit over the last year.

In turn, this gave the Bank of England the green light to do what it should have done some months ago – hit the pause button on interest rates to assess the full impact of the tight squeeze that is already in place.

Indeed, throughout the cost-of-living crisis, the media have said that inflation has been caused by a surge in food and energy prices, or whatever other prices are rising the most at the time. This is, at best, a description of inflation, not an explanation.

Supply shocks – such as Covid restrictions, the fallout from the Ukraine war, or Brexit – might explain why some prices are rising faster than others. But if these shocks had not happened, the inflationary pressure from excessive monetary growth might have popped up elsewhere.

The upshot is that monetary variables should be discussed more when assessing the outlook for inflation and economic activity. As it is, ‘groupthink’ means that the role of money is repeatedly overlooked, making further forecast errors and policy mistakes much more likely.

Julian Jessop

IEA Economics Fellow

‘Welcome surprise’ and ‘more pain to come’ - think tanks weigh in ([link removed])

BBC News ([link removed]) , The Daily Telegraph, and Euronews ([link removed])

A surprise to be sure, but a welcome one… Julian greeted the Bank of England’s decision to hold interest rates ([link removed]) with cautious optimism, saying that monetary policymakers had struck the right balance for the first time since the return of inflation.
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** Digital Markets Bill undermines investment, innovation, and rule of law ([link removed])
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This week, the IEA and International Center for Law and Economics (ICLE) co-published Digital Overload ([link removed]) , a paper highlighting the threat posed to the UK’s tech sector by the Digital Market, Competition and Consumers Bill (DMCC), by the IEA’s Matthew Lesh with the ICLE’s Dick Auer and Lazar Radic.
* The DMCC gives sweeping powers to the Competition and Markets Authority (CMA) to design bespoke interventions against companies engaging in ill-defined ‘digital activities’.
* The DMCC’s powers are defined broadly, meaning the CMA will have significant discretion to direct the development of digital markets; this is unlike the European Union’s Digital Markets Act, which, although still far reaching, contains more clearly defined thresholds, requirements and prohibitions.
* The DMCC empowers the CMA to take crucial decisions at every step of the process — e.g. in designating relevant activities, imposing conduct requirements and pro-competition interventions, investigating breaches, adjudicating wrongdoing and imposing significant fines — without full merits review.
* It will only be possible to challenge the CMA on process grounds under the judicial review standard, giving it great power.
* The regime will undermine investment in the UK digital sector, and associated innovation, because of the risk of cumbersome, unclear and ever-changing rules – along with a lack of accountability.
* New features could be delayed or not introduced for British users as firms seek to minimise the risk of falling afoul of the new regime and incurring hefty fines and stringent remedies. The UK’s position as a ‘science and technology superpower’ will thus be undermined.

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** Let’s be honest, we’re going to kill our efforts to tempt in more tech investment ([link removed])
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Director of Public Policy and Communications Matthew Lesh, City AM ([link removed])

No tech superpower… The risk of arbitrary interventions and fines of up to 10 per cent of global turnover means that companies could stop developing new products in the UK or delay new features for British users.

The Digital Competition and Consumers Bill threatens to wrap UK in red tape ([link removed])

ICLE Senior Scholar for Competition Policy Lazar Radic, Tech Monitor

Define your terms… The DMCC’s definition of ‘digital activities’ is so broad that the CMA could even end up regulating insurance firms, banks, and supermarkets.
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** Digital markets bill is a ‘recipe for disaster’
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City AM ([link removed]) and The Daily Telegraph

Investment repellent… The need for rigorous accountability could not be more pressing as the CMA flexes its muscles on AI and tech company mergers.
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Podcast: What’s wrong with digital markets regulation? ([link removed])

Double trouble… Co-authors Matthew Lesh and Lazar Radic discuss the CMA’s new powers under the DMCC and discuss how the legislation threatens the UK’s tech sector.

Handing yet more power to unaccountable regulators betrays the spirit of Brexit ([link removed])

Communications Officer Harrison Griffiths, CapX

Take back control… Brexit was predicated on the promise of putting the British Parliament and courts back in the driving seat. Giving unaccountable bureaucrats sweeping powers with little accountability would betray that promise.
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Find out more… Co-author Matthew Lesh outlines the findings in our latest explainer video.

IEA Latest.
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** Respecting the privacy of our donors ([link removed])
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Director of Public Policy and Communications Matthew Lesh, LBC & Guido Fawkes ([link removed])

Cat’s out of the bag… During an exchange with ‘comedian’ Dom Joly on LBC Cross Questions, Matthew warned that revealing the names of our donors could lead to harassment from the IEA’s more militant opponents. ‘100 per cent’, replied Joly.
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** Banning disposable vapes may turn more teenagers on to smokin ([link removed]) g
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Director General Mark Littlewood, The Times

Confronting reality… In an ideal world, nobody under 18 would be able to buy nicotine products. But in the real world, a vaping crackdown will have unintended consequences.
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Reaction to PM Sunak watering down Britain’s climate goals ([link removed])

Energy Analyst Andy Mayer, Reuters ([link removed]) , The Daily Mail ([link removed]) , and Guido Fawkes ([link removed])

A welcome breakthrough… Relaxing burdensome policies like the diesel car ban are welcome steps forward. But arbitrary Net Zero targets are still hammering peoples’ incomes.
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** Now Scots could pay even more for alcohol after government consults on raising minimum price further ([link removed])
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Head of Lifestyle Economics Christopher Snowdon, Daily Mail ([link removed])

Last orders… Minimum pricing has failed to tackle alcohol related harms. But the Scottish government seems intent to double-down.
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** Moral Sentiments: How statism corrupted the Left ([link removed])
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Communications Officer Harrison Griffiths and George Mason University Economics Professor Peter Boettke, IEA YouTube ([link removed])

What is left?… Belief in big government is ingrained within the political left. But in the 1980s, American economist Don Lavoie made a compelling case that central planning was antithetical to left-wing goals.
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The socialist calculation debate: Then and now ([link removed])

Head of Political Economy Kristian Niemietz, IEA Blog ([link removed])

Planned chaos… Kristian spoke to students at King’s Maths School on the socialist calculation debate, arguing that while it began as a 1920s issue, it remains a vital discussion in the 2020s.
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The senseless ban on snus ([link removed])

Head of Lifestyle Economics Christopher Snowdon, The Spectator ([link removed])

Smoke-free Sweden… With a daily smoking rate of six per cent and the lowest lung cancer rates in the European Union, other countries could learn something from Sweden’s liberal approach to snus.

IEA Insider.


** Economic Freedom of the World: 2023 Annual Report
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Double whammy… This week, the IEA co-published ([link removed]) the Fraser Institute’s annual report on the state of economic freedom around the world. Based on data from 2021, the UK ranked ninth in the overall ranking, up from 16th in last year’s report. But that doesn’t tell the full story…

Warning signs… As IEA Free Trade Fellow and report co-author Alexander Hammond pointed out in City AM this week, the UK’s higher ranking likely has more to do with lifting COVID restrictions before other countries than anything else. The UK’s overall freedom score remains lower than pre-pandemic, as do metrics on Britain’s regulatory burden, money soundness, and size of government.
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** IEA primers on campus
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Roll up, roll up!… As students across the country prepare to start the new academic year, IEA literature is essential reading for freedom-minded learners.

At the London School of Economics’ Freshers’ Fair, the LSE Hayek Society handed out IEA publications such as Eamonn Butler’s primers ([link removed]) on democracy and entrepreneurship and Stephen Landsburg’s People Paradox ([link removed]) , which analyses the impact of population growth.
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