The Bank Of EnglandÂ has decided not to expand its asset purchasing scheme for another month but with inflation increasing many fear that the previous schemes in quantitative easing (QE) have artificially increased inflation beyond its target.
These fears do appear to be unfounded because asset purchasing is exactly what it says on the tin, it is purchasing assets with a value of X for the cost of X. QE was always only designed to increase liquidity by swapping illiquid assets for readies, not to increase the size of the economy.
So why do we see such sharp rises in inflation with less money floating around the wider economy and, is this the beginning of a trend for inflation, or is it just a sharp blip but a blip none the less?
An increase in the price of oil will have an obvious impact on the price of transporting all goods both outward and inward and this may be the reason for the widening of the trade gap and recent sharp increases in the prices of importing goods but quantitative easing is not responsible here.
So why are we seeing a contraction and stiffening in all aspects of lending?
Well, let's not forget the banks are now required to hold more capital, are still bleeding from the continuing fall in commercial property prices and investments in countries such as Greece and Portugal and if you take into consideration the banks exposure to risk through investments in countries teetering on the edge of defaulting on debt it amounts to over 15% of GDP and that is not an easy amount for lenders to soak up.
All this leads to the banks demanding stricter lending practices in order to maintain profit by ramming the borrower (ranging from businesses to residential property mortgages and credit cards) into the gaping hole in the commercial property and potential foreign sovereign debt default dike.
It is this credit restriction that is to blame for the reduction ofÂ money supply in the wider economy. This coupled with the rising import and travel costsÂ are driving up the prices of goods, not quantitative easing through an over supply of liquidity within the economy.