Surge in money supply fuels inflation fears


Economics Correspondent

A surge in the amount of cash in circulation last month added weight to anecdotal evidence that retailers enjoyed a healthy Christmas.

December saw the biggest monthly rise in levels of notes and coin held by the public for more than a year, according to figures published by the Bank of England yesterday. It took holdings of cash up by pounds 186m to just over pounds 23bn.

The increase in the narrow money supply measure M0 - notes and coin in circulation plus banks' operational balances at the Bank of England - was the highest since early 1994.

A Treasury spokesman said it was too early to draw any conclusions but added: ''It suggests spending is a bit firmer than some people had been thinking.'' In its Budget forecast the Treasury predicted faster growth in consumer spending this year.

David Owen, at investment bank Kleinwort Benson, said yesterday: ''The money figures confirm that there will be a consumer recovery. Gloom about the economy is overdone.''

Although there is no iron link between the increase in M0 and the value of retail sales from month to month, the two tend to move together over time. Strong M0 growth in November was associated with a good month on the high street. The unexpectedly big 1.2 per cent jump in M0 last month took its growth in the year to December up to 5.9 per cent from 5.6 per cent in November. The annualised three-month growth rate, which indicates the short-term trend, shot up from 5.9 per cent to 9.1 per cent.

The level of notes and coin in circulation rose by 0.8 per cent to a level 6 per cent higher than a year earlier.

In recent monetary meetings the Chancellor of the Exchequer and the Governor of the Bank of England have expressed concern about the rapid money growth.

Some economists see it as a warning signal. ''The buoyancy of M0 in itself may be no cause for alarm, but there are no grounds for complacency regarding inflation,'' said Helen MacFarlane, an economist at Hoare Govett.