Inflation in Britain has risen to 5.4%, the highest rate in nearly thirty years. Last month our economics column analysed whether budget deficits were responsible for soaring prices
At first glance, this apparent supremacy of fiscal policy is awkward for fans of Milton Friedman’s view that inflation is “always and everywhere a monetary phenomenon”. Central banks, not governments, are charged with hitting inflation targets. But does the experience of the pandemic show that inflation is really fiscal?
So far, so Friedmanite. But which leg of the policy matters more: the fiscal stimulus, which boosted aggregate household wealth, or, which ensured the infusion was of cash and not of bonds? There is probably something special about infusing households’ balance-sheets with cash, says Chris Marsh of Exante Data, a research firm. He has suggested that a “rediscovery” of monetarism could be in the offing after the pandemic.
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