{"id":4702,"date":"2023-12-21T10:31:50","date_gmt":"2023-12-21T10:31:50","guid":{"rendered":"https:\/\/mmm.9dotdigital.ca\/?p=4702"},"modified":"2025-03-27T15:50:42","modified_gmt":"2025-03-27T15:50:42","slug":"uk-inflation-monetarist-forecast-on-track","status":"publish","type":"post","link":"https:\/\/mmm.9dotdigital.ca\/?p=4702","title":{"rendered":"UK inflation: “monetarist” forecast on track"},"content":{"rendered":"

The MPC’s November inflation projections are ancient history. Price pressures have plunged in line with a simplistic monetarist forecast suggesting a return to target in Q2 2024 and an undershoot in H2. <\/p>\n

The simplistic forecast is based on the Friedmanite rule that inflation directionally follows money growth with an average lag of two years. This is converted to a numerical profile by assuming a one-for-one relationship of deviations in inflation and money growth from 2% and 4.5% respectively. <\/p>\n

Friedman emphasised the variability of the money growth \/ inflation lag but a two-year assumption has proved accurate in timing the inflation peak and subsequent decline – see chart 1. <\/p>\n

Chart 1<\/strong><\/p>\n

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A post<\/a> in July suggested that the six-month rate of increase in the CPI, seasonally adjusted, would fall to 2% annualised or lower around end-2023, reflecting a decline in six-month broad money growth to below 4.5% annualised in Q4 2021. The fall is ahead of schedule, with the six-month CPI increase at 1.6% in November. <\/p>\n

The simplistic forecast suggests that six-month inflation will fluctuate around the current level through mid-2024 before dropping further in H2 – chart 1. The implication is that the annual rate will return to target in Q2 and undershoot during H2. <\/p>\n

By contrast, the modal forecast for annual inflation in Q4 2024 in the November Monetary Policy Report was 3.1%, with the mean forecast (incorporating an upside risk assessment) at 3.4%. <\/p>\n

Broad money momentum remains negative, suggesting that an inflation revival is unlikely before mid-2025. <\/p>\n

Bottom-up considerations support the view that annual inflation will return to target by next spring, assuming no adverse shocks: <\/p>\n