Inflation in the UK was barely half a percent a year in late 2020. A year later it was pushing 5 per cent, and by the end of 2022 quarterly year-on-year inflation peaked at 10 ¾ per cent. Similar rises occurred across most of the developed world, with significant consequences for living standards, politics, and the credibility of economic policy makers. Yet, surprisingly, almost no economists saw this coming – part of a “dismal performance” and “collective failure” described by Harvard professor and economist Jason Furman.

Professor Tim Congdon – Britain’s foremost monetarist – was an exception. As early as March 2020, he forecast an “inflationary boom” in 2021 and 2022. This book explains how in two parts. The first provides a clear restatement of ‘broad money monetarism’ – consciously referencing Milton Friedman’s famous ‘restatement’ of 1956 and explaining differences. The second describes how he made his forecasts and evaluates their performance over the early 2020s. As the author writes in the introduction “the book is to a large extent an exercise in “I told you so.”” This sounds a little ominous at the start, but what follows is a clear and measured argument that money both matters and can be usefully used to predict changes in nominal output over the medium term. The evidence presented is strong, and economists would do well to engage with the arguments put forward.

The first portion of the book concerns theory and is by far the densest portion of the book. Despite describing himself as a ‘Keynesian monetarist’, he is keen to distance himself from both conventional Keynesian analysis of inflation as well as more ‘narrow’ Chicago school monetarism. Congdon contends that it is the level of “broad” money, consisting of all money balances held by non-bank private sector agents, that matters in the determination of nominal national income and wealth over the medium term. This definition of money sets him apart from narrow ‘Chicago’ monetarism as he describes it, as transfers between different types of deposit (or cash holdings) cannot affect the total stock of money. The second part of his theory is that ‘variable income assets’ (real estate and equities) are at least as important as bonds in determining national wealth and output – and therefore inflation. This sets him apart from modern Keynesians whom he accuses of being too fixated on bonds as the only savings asset in models of the economy. This emphasis on variable income assets is also important to his answer to Samuelson’s critique of monetary transmission as a “black-box theory”, and he presents a clear description of the channels by which various agents with only roughly stable money holding preferences will adjust their portfolios in response to ‘monetary disequilibrium’. This adjustment leads both to changes in real output in the short run, and to changes in the price level in the medium to long term. A key point is that these changes are upstream of the changes in the labour market normally used to forecast near term inflation.

Overall, the discussion of theory is detailed but clear, as well as grounded in data and the long history of arguments on these topics. Despite his expressed irritation with economists past and present, he is not doctrinaire and does not overclaim relative to the data he presents. He allows that the ‘velocity’ of money is not stable but claims that changes in it largely are. Whether this stability is strong enough to work in a formal model of the economy is not a question he answers though. He is disparaging of the ‘interest rates only’ economics central banks but does not argue for replacing this with monetary targets or similar.

The second part of the book covers his forecasts of early 2020’s inflation in the US, UK, and Eurozone. He quotes extensively from forecasts he circulated in early 2020, before evaluating whether these forecasts were accurate and is happy to compare them to warnings from prominent central bankers about the risks of deflation in the same period. A key feature remains the behaviour of asset prices. He is clear that this can only be explained by movements in broad money and argues that this prefigured the tightening in labour markets making it a more useful leading indicator. His record over this period is impressive and, while not perfect with regard to the return of monetary velocity to trend, clearly supports his case that changes in money mattered for the inflation surge of 2021 and 2022. He also covers other possible explanations for the inflation surge, including the war in Ukraine and spike in energy prices. These are not persuasive in his view, and he cites differences in inflation between the US, UK, and Eurozone which all saw high rates of broad money growth on the one hand and Japan and Switzerland which saw significantly less. This section could have benefitted from a more detailed breakdown of inflation by its sources; however, he is happy to allow that supply chain disruptions and higher energy prices had a significant impact over this period. What he is significantly less happy about is the evasion of responsibility by central bankers, and he criticises several senior figures in UK, European, and US policy making. An area he could have spent more time on is what their models ought to have been. He is relatively silent on what he thinks the limitations of monetary analysis are and what the balance should be between a focus on labour market tightness and inflation expectations on the one hand and paying attention to monetary aggregates on the other.

As the book demonstrates, monetary economics can be a tetchy subject. Congdon states in his preface that among his intellectual debts “most are not to economists living today” (emphasis in original). This apparent combativeness may be off-putting to some readers. But given the importance of the subject, strong views ought to be welcomed especially when clearly expressed and supported with evidence. Covid and its aftermath illustrated both the painful impact of inflation and just how differently economists’ forecasts could differ. Congdon was one of a small number of economists on either side of the Atlantic who forecast surging inflation and forecast it early – when many prominent economists were more concerned about deflation. His book is not ‘easy’, but it provides an excellent primer on why these forecast differences occurred and on one theory that – this time at least – proved more accurate than the consensus.