The Bank of England’s deputy governor for monetary policy says energy and supply-chain shocks, not the rise in household balances driven by pandemic-era support, have been the main cause of the inflation that has been plaguing the UK.
Speaking at the National Institute of Economic and Social Research, Ben Broadbent examined whether the current inflation crisis is a result of the 2020 growth in the “broad money supply”, which is predominantly made up of funds held in commercial banks, plus cash in circulation.
That growth was mostly related to measures taken to provide support during lockdowns.
“Supported by the furlough scheme, and because their spending was held back by the lockdowns, households accumulated significant deposits during the pandemic,” Broadbent noted.
Broadbent said that it was “hard to argue” that increased household bank balances explained the inflation that followed.
“For one thing, the growth of consumer spending over the following year, once the pandemic restrictions were lifted, was actually weaker than either the [Monetary Policy Committee] – or, indeed, a simple, money-driven consumption function – had predicted,” he said.
“Nor does the pattern of price rises, over the past couple of years, fit the story. A pure, money-driven inflation affects all prices equally.
“What we’ve actually seen are huge shifts in relative prices – first the jumps in those of non-energy traded goods in 2021 and then, in 2022, the enormous rises in the costs of imported food and energy.”
Instead, Broadbent pointed to the supply chain disruption in the later pandemic era, combined with the impact of Russia’s invasion of Ukraine, as the factors that best explain the cost-of-living crisis.
“There are lots of things – ‘shocks and disturbances’ as the MPC’s remit puts it – that can affect inflation,” he said. “In this case it’s clear what those have been: the hits to the supply of non-energy goods during the pandemic, to those of energy and food during the war, and the resulting rise in their global prices.
“Thanks to the significant hit to real incomes they involved, these shocks have also had sizeable second-round effects on domestic wages and prices.
“As an explanation for the inflation we’ve experienced, I think this fits the actual data better than the single fact of strong household money growth during the pandemic.”
Broadbent addressed the claims that growth in the broad money supply and inflation were the “inevitable” results of quantitative easing - when the Bank buys bonds with newly created money.
He pointed to other instances where this process occurred but the money supply and prices did not increase, as well as the fact that commercial banks can create increases in broad money.
According to the ONS, the rate of inflation in the UK is 10.1%, after back-to-back months in which price rises came in ahead of economists’ expectations.
