Inflation is always and everywhere a monetary phenomenon.
Milton Friedman, A Monetary History of the United States 1867-1960 (1963)
Always and everywhere apart from in Britain, that is.
The Bank of England on Thursday published provisional estimates of broad money (M4) and credit (M4 lending) for December, noting that the former fell 1.1 per cent on the previous month.
Meanwhile, December also saw a sharper than expected annual rise in CPI of 2.9 per cent.
According to Richard McGuire, senior fixed income strategist at RBC Capital Markets the M4 fall was the largest monthly drop since records began in 1982.
The measure took the year-on-year rate down from 9.2 per cent to 6.4 per cent — its lowest reading since October 2003.
An increase of 0.9 per cent on the monthly figure had been expected, according to Marc Ostwald at Monument Securities.
As McGuire reminded us though, the Bank of England will likely reserve judgment until its preferred measure of money supply — M4 excluding other intermediate financial corporations — is released later this month.
However, the point is:
. . . the softness of today’s numbers further challenges the usefulness of QE in boosting money supply. We continue to expect the BoE will opt not to extend the current £200b QE limit on February 4 but see these data as supporting a possible cut in its deposit rate (effectively signalling a shift in strategy from targeting the stock of money to its velocity).
Which means December’s inflation spike probably had more to do with imported inflation than any QE-related increase in money supply.
It does, however, reflect the challenge the Bank of England faces in stimulating lending while controlling inflation in an economy so dependent on imports — at least with conventional monetary approaches or QE.
As McGuire notes, other measures like cutting the deposit rates might be more effective.
According to Ostwald, meanwhile, the BoE’s monthly Trends in Lending report was likely a greater point of interest in the context of Mr King’s observation that “monetary growth . . . at present . . . is undesirably low”.
Lending did appear to improve in November. The flow of money lent to British businesses picked up for the first time since January 2009, registering a £0.1bn rise versus a decline of £4.2bn the month before.
The flow of net mortgage lending, meanwhile, rose 0.9 per cent to £1.5bn — the largest flow since February 2009. That said, the Bank said net lending by the major UK lenders slowed in December.
Total net consumer credit flows, meanwhile, also remained negative, as did the 12-month growth rate in the stock of lending.
A mixed bag of data overall.
Related links:
Missing from the MPC minutes – FT Alphaville
More QE money based on money supply – FT Alphaville
UK inflation fan-dango – FT Alphaville