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In the twenty five years since the Bank of England was made 'independent', inflation has touched its highest level, with every expectation it will go higher. Who’d have thought it?
Well, Professor Tim Congdon and Dr Juan Castañeda certainly would have. This week, I was very pleased to chair a meeting at the IEA where they spoke, in part reprising their paper, 'Inflation: The next threat?', from June 2020, when they clearly foresaw what was about to occur. They noted there was going to be an ‘extremely high growth rate of the quantity of money’, and concluded that ‘a big resurgence in inflation is implied by our analysis’.
The pair spoke to IEA Head of Public Policy Matthew Lesh after the meeting, which you can watch on the IEA YouTube Channel here.
Their presentation drew on the Quantity Theory of Money, which puts the money supply (or ‘quantity of money’) at the centre of the analysis. Thinking in Quantity Theory terms, one expects large increases in the money supply to bring inflation. But to date that has been limited because the ‘velocity of circulation’ of money has fallen – although there is plenty of money in the system, it has accumulated as balances rather than being spent.
The problem there, as Congdon and Castañeda argued, following a long tradition in economics beginning with Milton Friedman’s arguments in the 1950s, is that the balances people and firms wish to hold are historically pretty constant.
Largeish short-term variations occur, and small longer-term ones. But a large change like the recent one cannot be expected to persist. If, and when, the historical norms reassert themselves, the money already created will circulate faster, and prices must rise.
And of course, we are starting to see it. The latest British inflation figure saw a 5.4 per cent increase in the consumer price index in the year to December. But the quantity of money, according to Institute of International Monetary Research data, has seen double-digit percentage increases over the last couple of years, and that suggests much bigger price rises are in the offing.
One notable point is how the Bank of England has failed to foresee this outcome. In January 2020, the Bank saw only about a 5 per cent chance of inflation in 2022 exceeding 4.5 per cent; in May, it presented an ‘illustrative scenario’ which saw inflation in 2022 at its target rate of 2.0 per cent, having been much lower in 2021 (actually, it turned out higher). And in November they projected 2 per cent inflation for 2022, and still saw only about a 5 per cent chance of inflation as high as it has now turned out to be.
Much more surprising than that, though, and perhaps an explanation of it, is that the Bank of England reports do not even make mention of the increases in the quantity of money we have seen. Pages and pages describe the outlook for the economy and inflation. But the expression ‘money supply’ – and in November, even the word ‘money’ – makes no appearance! As inflation rises, surely at the very least, the Bank needs to explain its thinking in Quantity Theory terms.
Dr James Forder
Academic and Research Director, Institute of Economic Affairs
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PAYING THE PRICE
As warned by Congdon and Castañeda, prices have surged, with ONS data showing inflation hit a 30-year high of 5.4 per cent in December.
Speaking to The Telegraph, IEA Economics Fellow Julian Jessop said: "The common factor across the world is there's been an explosion in the amount of cheap money. And if you keep pumping cheap money into an economy facing supply cuts, then the result is going to be inflation."
IEA Head of Public Policy Matthew Lesh appeared on BBC Radio Ulster to discuss the causes of the rise – and what can be done to bring it down. You can listen back here.
In order to support families with the cost of living, the Treasury is reportedly considering a one-off 'cost of living bonus' of up to £500. Commenting on the proposal, IEA Editorial and Research Fellow Professor Len Shackleton argued that this is "short-term fix" that will do nothing to reverse long-term problems such as "ill-designed green levies and virtue-signalling restrictions on fracking".
He noted that a temporary increase in Universal Credit payments or delaying the introduction of higher National Insurance rates would be a simpler way to offer emergency support. You can read his full comments here.
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iN THE MEDIA
The big fee-ze... On Monday, Culture Secretary Nadine Dorries announced that the BBC licence fee will be frozen for the next two years, sparking a public debate over alternative funding models.
In her column for The Spectator, IEA Director of Communications Annabel Denham argued that scrapping the unpopular levy is not the same as abolishing the BBC, as some detractors claim. Instead, the BBC must find a sustainable way to fund its programming that is fit for the 21st century.
IEA Director General Mark Littlewood called for an open debate about the future of the licence fee. He noted that alternative funding models, including a subscriber-owned mutual model as proposed by Professor Philip Booth, should be explored. His comments were covered in the Express, and regional press.
Mark also gave his analysis in a debate on BBC 5 Live, and on the IEA YouTube channel here.
Leave it B... In what has been a tumultuous political week, IEA Head of Lifestyle Economics Christopher Snowdon welcomed the news that Plan B Covid restrictions will end later this month.
Christopher noted that vaccine passports have been unsuccessful in other countries and that face masks are "largely theatrical", adding that "England’s strategy of opening up in summer and rolling out boosters in the autumn has been vindicated.” His comments were featured in City AM.
Keep it on... Despite the government's announcement that people no longer have to wear face coverings in public spaces, London Mayor Sadiq Khan decided to maintain mask mandates on Transport for London services.
In an article for The Telegraph, IEA Head of Public Policy Matthew Lesh noted that the limited benefits of mask-wearing need to be carefully weighed up against the costs, while Christopher Snowdon appeared on GB News to discuss the policy. You can watch a clip here.
Furlough fraudsters...? It was disclosed earlier this week that £5.8bn has been 'stolen' through Covid support schemes. Writing for City AM, Annabel Denham argued that, considering the generosity and scope of the measures, it is unsurprising that there was fraud, error and waste. This should act as a "wake up call" to ministers to spend taxpayer's money less frivolously.
Eat the rich... Oxfam published its annual inequality report this week, which claims that "inequality kills".
Commenting on the charity's claims, IEA Head of Public Policy Matthew Lesh noted that: "If Oxfam really cared about the poor, the charity would campaign for the best poverty alleviation tools known to human kind: liberal institutions, free trade and free markets. Instead they want to discourage entrepreneurship with punitive taxes and prevent scientists from being rewarded for developing vaccines.”
You can read his full comment, which were reported in the Express here.
Pay as you go... The Mayor of London Sadiq Khan is considering introducing a pay-per-mile system of road pricing in London.
Quoted in the The Telegraph, IEA Energy, Environment and Infrastructure Analyst Andy Mayer argued that the mayor's plan to charge by the mile and by type of car "has all the negatives of road pricing, with none of the positives. It looks like greenwashing a crude attempt to raise taxes, and in the most regressive way possible."
Start posing, start drilling...Andy also wrote for The Critic on the failure of the government's centralised decarbonisation strategy. He noted that Net Zero dogma has stifled the market's ability to innovate and produce affordable energy.
Instead of importing expensive gas from the US, Andy argued, the UK must ensure it has a supply of affordable domestic gas which can alleviate price pressures and allow investment in greener energy.
Party over for Boris?... In her fortnightly column for Conservative Home, IEA Head of Media Emily Carver argued that the 'partygate' scandal proves how the restrictions implemented by the government at the time were disproportionate to the level of risk.
Press preview... And Annabel appeared on Sky News to review the Sunday's papers. The discusses 'Partygate', the BBC licence fee, and the rising cost of living.
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ON THE IEA BLOG
FCA goes woke... IEA Head of Regulatory Affairs Victoria Hewson noted the mission creep of the Financial Conduct Authority (FCA) as they introduce targets for women and ethnic minorities on boards for listed companies.
Victoria noted that these targets have nothing to do with the organisation's objectives of protecting and enhancing the integrity of the UK financial system. Instead, extra requirements for diversity reporting will add costs and bureaucracy to firms. You can read here.
Gas crunch... Energy policy continues to dominate the agenda as price rises hit households across the UK. On the IEA blog, IEA Trustee and Director of Summerleaze Ltd Bruno Prior argued that the energy crisis is not a moral crisis, but rather an economic problem, with demand outstripping supply.
Although boosting supply by utilising fracking and off-shore drilling could alleviate prices, it is not a silver bullet. Policy makers must resist more intervention and price manipulation, and allow the market to meet the challenge. This would free up money for the Department of Business, Energy and Industrial Strategy to assist those struggling with bills in the short-term. Read here.
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IN CASE YOU MISSED IT
On 12 January, IEA Head of Regulatory Affairs Victoria Hewson gave a lecture to post-graduate engineering students on the Technology Strategy and Business Models course at Cranfield University.
Victoria discussed how the actions, and inactions, of governments can affect strategies for innovative businesses and entrepreneurs. The lecture covered some of the building blocks on which government policies are based, including the successes and failures of industrial policies in Britain, the EU and the US, and posed the question of how business people can best adapt their strategies in response to government policies and incentives.
Students for liberty... IEA Head of Political Economy Dr Kristian Niemietz gave a webinar at a Students for Liberty event on the continued popularity of socialism. He discussed his paper 'Left Turn Ahead', which warned young people do not 'grow out' of their negative opinions towards capitalism as some on the right suggest. You can watch the webinar here.
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IEA PATREON
Thank you to all of you who have already signed up to become an IEA Online Patron. Becoming a Patron grants you VIP access to our latest videos, priority invites to our virtual events, and the opportunity to engage directly with IEA Director General Mark Littlewood and the IEA team. For just a small donation you can get all these benefits and more.
To visit the page and find out more about the IEA’s Patreon, follow the link here or watch our trailer here.
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IEA DIGITAL
The Swift Half... In the latest episode of The Swift Half, Christopher Snowdon spoke to Tom Harwood, Political Correspondent and presenter for GB News, to discuss the week's headlines, including whether Boris Johnson can survive 'partygate'. Watch here.
IEA Podcast... IEA Communications and Public Affairs Officer Kieran Neild-Ali interviewed Harry Fone, Campaign Manager at the TaxPayers' Alliance to discuss the BBC licence fee, its origins, its shortcomings, and what the future may hold for the BBC. Listen here.
You can now watch a talk by Diane Coyle from the conference the IEA hosted with the Information, Technology and Innovation Foundation on the competition and regulation of digital markets.
Diane Coyle is the Bennett Professor of Public Policy at the University of Cambridge. Diane co-directs the Bennett Institute where she heads research under the themes of progress and productivity.
You can watch here.
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WE'RE HIRING!
The IEA’s Communications Department is looking to hire an intern to support the team’s editorial output. This is a full-time internship, with expenses paid.
The primary responsibility will be to write, edit and commission articles, and draft newsletters, later promoting this content across the IEA’s social media channels. Find out more here.
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CALLING ALL STUDENTS!
We have a several opportunities coming up for students, including exam revision courses, internship programmes, and summer schools.
A-Level / IB Economics Exam Revision Course... For the first time, we will be running an exam revision course from Tuesday 12 – Thursday 14 April.
Our week-long Internship Programme will also run as normal from Monday 4 – Friday 8 April. Applications for both programmes close on February 4 2022.
Residential Summer School... In partnership with the Institute of International Monetary Research, the Vinson Centre, and the Initiative for African Free Trade and Prosperity, the IEA will host a residential summer school.
This programme is open to undergraduate students and will take place from 27 June to 8 July. It will have four streams: general economics, monetary theory, economic history, and trade and globalisation.
Sixth Form Future Thought Leaders’ Programme... You can also apply to attend a week-long programme for sixth formers which will take place from Monday 25 – Friday 29 July. The week will include lectures, discussions, and debates with expert economists.
Summer School Internship... Last but not least, our summer school internship will start from Tuesday 2 August – Friday 19 August. Interns will participate in lectures, seminars, debates, discussions, as well as workshops on professional and career development.
You can find out more about all of our internship programmes here, or email IEA Education, Outreach and Programmes Manager Brittany Davis at [email protected] with any questions.
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TIME FOR A (STUDENT) CHALLENGE
Entries are also still open for this year's Budget Challenge. Schools can enter teams of up to four students to put together a submission that will outline a budget with taxation and spending policy for the United Kingdom in the coming financial year. The deadline to submit is Friday, January 28th 2022.
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