The subject of this post says it all. I did the piece of work below for an interview at Hawkpoint Wealth Management. The key of this subject is to predict large economic movements of supply of money that will impact inflation. In a nutshell, inflation is driven by the ‘volume’ of money that exists in an economy. Let me illustrate:
- because banks are failing and the economy is in recession, the government decided to pump ‘liquidity’ to kick start the economy
- the extra liquidity means that is there is more ‘cash’ in the economy than the latter actually produces (imagine if everybody in the UK received a 30% pay rise for the same amount of work produced)
- in turn, the increase in cash, decreases the value of the money and prices increase.. here you go: inflation!
Because of this quantitative easing (QE), there is no doubt that there WILL be inflation (some is kinda good) the question is HOW MUCH and WHEN. Well, that, in turns, depends on (1) how quickly the banks (principal recipient of QE) release the cash in the economy and (2) how quickly the UK economy grows to absorb that extra cash. A way round this is, of course, if the extra cash leaves the country 
Now, the latest quarterly figures of the economy show an increase in trade deficit, which, on its own, means nothing. A trade deficit means that the country is importing more than it is exporting… i.e. not a great way to kick start the economy… imagine that instead of producing more ‘stuff’, we just buy it from someone else… all the while more and more cash is being poured in the economy, see a problem there?
So, what can we do? well, have a look at the presentation 