How big a danger is rising inflation? This is one question the Bank of England’s monetary policy committee will discuss next week.
Given the huge uncertainties about the path of the pandemic, it is futile to provide numerical forecasts. What we can do, though, is consider some of the mechanisms that might move inflation next year.
You might think that one of these is simply that the Bank of England has been printing money: it’s done a further £310bn of quantitative easing this year, and might well do even more soon. This increase in the money stock, however, is more or less matched by increased demand for money as cautious savers and financial institutions seek liquid assets as protection against uncertainty. The notion that rises in the money supply necessarily lead to higher inflation is not corroborated by the facts, and is unlikely to be so this time.