Does falling inflation show that interest rates are too high?

Well that was a surprise. At just 3.9 per cent, down from 4.7 per cent, the latest inflation figure published today came as a shock for many. The figures are far lower than the consensus forecasts, and even low enough to allow the Prime Minister Rishi Sunak to meet his forecast to halve the rate by the end of the year. But should we really be surprised that inflation has fallen so rapidly?

Monetarists – who noticed that the money supply has been contracting since the start of the year – won’t be taken aback by the inflation figures. They said all along that the flow of money is the key to inflation – and they’ve been proven right. Economists who bothered to look at these monetary supply figures, which have been contracting noticeably, have been saying for months that prices would soon stop rising. Indeed, the shadow monetary policy committee, made up of independent economists, has been arguing for a cut in interest rates right away as a result.