What the Bank of England won't tell you about inflation

How the quantity theory of money explains the past, present and future of inflation

By Damian Pudner

Inflation is often called the silent thief in our wallets—a stealth tax that erodes purchasing power, disproportionately hurting those on fixed incomes by diminishing the real value of their earnings and savings—all without any formal rise in tax rates. (Though for that, we only need to wait for the budget on 30 October.) Despite its sweeping impact, the causes of inflation are frequently misunderstood. Inflation wasn’t caused by secondary factors such as COVID-19 supply disruptions or Putin’s invasion of Ukraine. It is driven by flawed monetary and fiscal policies.

Photo by Alicja Ziaj on Unsplash

There are two broad categories of inflation: demand-pull and cost-push.

Demand-pull inflation occurs when too much money chases too few goods. Since the Global Financial Crisis, central banks— including the Bank of England—have relied on flooding the market with cheap money at every sign of economic instability. Quantitative Easing (QE) and artificially low interest rates may have provided a short-term boost to economic activity, but they merely papered over structural issues while laying the groundwork for long-term inflationary pressures.