A significant fall in UK inflation is in prospect. In the two months to May 2023 the consumer price index rose by 1.9%. It is very improbable that the CPI will increase by as much as that in the two months to May 2024, even though – for example – oil prices have advanced quite briskly in recent weeks. Suppose that the CPI goes up by 1.0% in the two months to May 2024, which is very much on the pessimistic side of expectations. Then the annual rate of change will drop between March and May by (([1.019/1.01] – 1) x 100)%, which is roughly 0.9%. The annual rate of change in the CPI was 3.2% in March. With the assumed 1.0% increase in the two months, the annual rate of change in May – to be announced in June – will come to 2.3%. This will be close to the official 2% target and well within the permitted band of 2% plus or minus 1% either side of the 2% figure. Indeed, lower numbers are plausible.

Will the Bank of England then deserve applause for bringing inflation back on track? In the accompanying video I argue that it most certainly does not deserve any applause. In 2020 and 2021 the Bank organized very large purchases of assets, mostly gilt-edged securities, and so increased the quantity of money sharply. As the chart below shows, in the two years to end-2021 UK banks’ “lent” almost £400b. to the public sector, equivalent to about 18% of M4x broad money at the end of 2019. (The “loans” mostly took the form of increases in banks’ cash reserves, which created funds used by the Bank to purchase the gilts, mostly from non-banks.) Here was the dominant contributory factor in the surge in M4x growth in that period, with its annual rate of increase peaking at 15.4% in February 2021. The excess money growth then caused the asset price mini-bubbles which were a feature of 2021, and acceleration in the rises in the prices of goods and services which resulted in double-digit consumer inflation in late 2022 and early 2023.