Inflation, Money Growth, and Second-Round Effects: How Effective has the Bank of England’s Monetary Policy Been?

Authored by: Rares DascaluRuby BellHubert KucharskiOwain PrescottArchie RyanShahzeb Tahir.

Published 2 months(s) ago.


With UK inflation remaining higher than other advanced economies, the recent inflationary episode has proved particularly sticky. Several commentators have provided suggestions behind why such has been the case, with explanations ranging from record-high wage growth, Brexit, and firms increasing mark-ups on goods. However, most fail to explain the severity of these factors or even the mechanisms through which they operate. To fill this gap, this report aims to determine and explain the leading factors driving the UK’s recent inflationary episode by examining second-round effects propagated through a conflict between the interests of workers and firms. The report finds that, by failing to account for this conflict, policymakers at the Bank of England held an erroneous view of inflation as ‘transitory’, suggesting that it would soon dissipate without any policy response. To show this, the report provides a review of the Bank of England’s monetary policy reports from May 2020 and November 2023, displaying them in a timeline of events that demonstrates clear evidence of such a benign view. The report’s findings suggest that the Bank of England raised interest rates and ceased its quantitative easing six months later than it optimally should have. Through identifying the factors cultivating inflation and critically analysing the Bank of England’s monetary policy, the report provides several policy suggestions to avoid future monetary mismanagement and mitigate the impact of second-round effects.

Read the full report here.