Inflation in X* and Monetary Policy Response

This report assesses the inflation trajectory in the UK and the subsequent response through framing monetary policy in 2022. It describes the pattern and merits of each measure of inflation, factors contributing to the trajectory of inflation in 2021/2022, and the monetary policy response. The report concludes that the Bank of England has raised the bank rate by 0.25% as a monetary response to curb inflation.

A BRIEF OF INFLATION IN
X* AND THE MONETARY
POLICY RESPONSE

TABLE OF CONTENTS
1: INTRODUCTION.......................................................................................................................3
2: The Inflation Path........................................................................................................................3
Description of pattern & merits of each measure........................................................................4
3: The Factors Contributing to the Trajectory of Inflation in 2021 / 2022......................................5
Supply side factors influencing inflation within UK..................................................................5
Demand side factors influencing inflation within UK................................................................5
4: The Monetary Policy Response...................................................................................................5
5: Conclusion...................................................................................................................................6
REFERENCES................................................................................................................................7
Books and Journals.....................................................................................................................7
Online..........................................................................................................................................7

1: INTRODUCTION
The aim of this report to assess inflation trajectory with reference to UK and the subsequent
response through framing monetary policy in the year 2022.
2: The Inflation Path
Figure 1: Headline Inflation 2000 to 2021 in UK (average annual % rate)
Source: International Monetary Fund, World Economic Outlook Database, October 2021
Figure 2: Consumer Price Inflation (annualized % rate) 2021 to 2022 in UK
Source: Source: Trading Economics, February 2022

Figure 3: Inflation in 2021-22 in UK (month-on-month % rate)
Source: Trading Economics, February 2022
Description of pattern & merits of each measure
1. In figure 1, the pattern is quite irregular indicating year to year changes in rate of
inflation as a result of monetary policy response. The merits of annualized rate of
consumer price inflation is that it helps in measuring changes taking place in payment
made by consumers for a basket of goods & services on an average basis over the time
(World Economic Outlook Database. 2021).
2. In figure 2, there is a constant pattern of both core and headline consumer price inflation.
Core inflation on an annualized basis is helpful in accurate estimation of inflation trend
while headline inflation is considered as a better measure of forecasting future prices of
goods & services by taking into account the prices of food and energy.
3. In figure 3, the pattern is like alternatively increasing and decreasing for month-on-month
inflation which is helpful in identifying how much goods have become expensive or
cheap over a period which is generally a year (UK's inflation rate. 2021).

3: The Factors Contributing to the Trajectory of Inflation in 2021 / 2022
Supply side factors influencing inflation within UK
 Shortage of factors of production: It leads to reduction in industrial production and excess
capacity which leads to increase in prices. Within UK, energy prices are rising which
leads to higher cost of production and poor margins. Therefore, leads to lower supply and
higher inflation (Surging inflation in the UK. 2021).
 Increase in exports: It leads to shortage of goods within the domestic market and thus
inflation. There is a rise in exports from UK around 4.6% as a result of 15.2% percent
jump in exports to Non-EU nations (United Kingdom Exports. 2021).
Demand side factors influencing inflation within UK
 Increase in Money supply: It leads to higher aggregate demand as evidence within UK
where money supply has risen from 2160 billion GBP in 2016 to 2890 billion GBP in
2021 (Total managed expenditure of the United Kingdom government. 2021).
 Increase in Public expenditure: It leads to more facilities funded by government causing
aggregate demand to rise (Angelina and Nugraha, 2020).
4: The Monetary Policy Response
Figure: 4 – Monetary Transmission Model
Source: Financial times
From the above monetary transmission model, the monetary response to inflation trajectory has
been identified as reserves. Through monetary policy, central bank raises the reserve

requirements which made it compulsory for banks to maintain higher proportion of their total
deposits in the form of liquid cash. Accordingly, bank ability to supply loan gets reduced and
consequently aggregate demand also gets reduced.
The risk associated with this monetary policy response is that there would be reduction in
investment made by producers through loans and accordingly, economic growth and
development gets hampered.
5: Conclusion
Therefore, it has been identified that currently, there is rising trend in inflation within UK
and for this, the Bank of England has raise bank rate by 0.25% as a monetary response to curb
inflation.

REFERENCES
Books and Journals
Angelina, S. and Nugraha, N. M., 2020. Effects of Monetary Policy on Inflation and National
Economy Based on Analysis of Bank Indonesia Annual Report. Technium Soc. Sci.
J., 10, p.423.
Online
Surging inflation in the UK. 2021. [Online]. Available Through
<https://voxeu.org/article/surging-inflation-uk>
World Economic Outlook Database. 2021. [Online]. Available Through
<https://www.imf.org/en/Publications/WEO/weo-database/2021/October>
UK's inflation rate. 2021. [Online]. Available Through
<https://tradingeconomics.com/nigeria/inflation-cpi>
Total managed expenditure of the United Kingdom government. 2021. [Online]. Available
Through <https://www.statista.com/statistics/298465/government-spending-uk/>
United Kingdom Exports. 2021. [Online]. Available Through
<https://tradingeconomics.com/united-kingdom/exports#:~:text=22%2DMonth
%20High-,Exports%20of%20goods%20and%20services%20from%20the%20United
%20Kingdom%20rose,exports%20to%20non%2DEU%20countries.>