Tuesday, May 17, 2011

British Inflation Reach Post-2008 High

Consumer price inflation in Britain rose to 4.5% in April-the highest since 2008. As a result the 2-year average of inflation rose above 4% while the 5-year average is well above 3%.

However, this year's increase is not the result of recent monetary inflation but rather the lagged effect of previous money supply increases as well as consumption tax (both VAT and excise duties on alcohol and tobacco) increases. By contrast, during the latest year, money supply growth in Britain has been slightly negative.

This means that though the annual rate might rise some more before falling, we will later this year and next year see a significant drop in British pricw inflation. And the sharp drop in real money supply that this implies is anything but bullish for the oulook of British growth.