BBC/ONS June 2022
  1. If there is “too much” demand and not enough supply of goods, the effect of the excess demand is to force prices upwards. This is how the market mechanism deals with or tries to get rid of the excess demand.
  2. Supply side factors: this is the other side of the coin: if there is a lack of supply, then supply cannot meet demand so again prices are forced upwards. The rising price is a solution to the problem of excess demand or lack of supply in that it either incentives demand to drop back, or encourages firms to (eventually) supply more.
  1. Inflation is a measure of the average price level across the economy — not just oil, gas and food. It includes the prices of the everyday, average basket of goods purchased by the average household. (ONS) . Oil and gas feed into these prices of course, but they are far from the full story.
  2. Inflation had begun to increase — and exceed its +-(1%)2% target — in 2021 — prior to the Ukraine conflict.
  3. The Ukraine explanation ignores the demand side of the story.
Source: Government Spending Review
Source: ONS
Source: Bank of England
Source: Money Week
  • Are we only now seeing the effect of QE, on inflation? Why would that be? Through what mechanism is the programme of QE now feeding into measures of everyday inflation?
  • Could it be the case that the reason QE was not as inflationary as first feared, because of a very elastic, easy supply side environment? Looking at our aggregate demand and aggregate supply diagram, we can see that an increase in spending — in AD — is only inflationary if that demand cannot be met by supply. If supply is plentiful, then there is no reason for price to increase. Prior to the pandemic, a seemingly endless supply of goods (think Amazon) and labour (pre Brexit) lulled us into a non inflationary environment. Demand is only in excess if there is a lack of supply.

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