The broad money supply comprises monetary instruments of varying liquidity, ranging from physical cash and current accounts to time deposits and bank bonds with a term of several years. A “Divisia” monetary aggregate attempts to measure the “transactions services” provided by the broad money stock by applying weights to the various components, with these weights inversely related to interest earned (on the assumption that a higher interest rate is offered to compensate for illiquidity).

The Bank of England’s UK Divisia indices are ignored by both private and official economists but are monitored here for confirmation of signals from the preferred M1 and M4ex aggregates. Real (i.e. CPI-adjusted) Divisia money has foreshadowed swings in the economy in recent years and has accelerated strongly in 2012, with six-month growth in the less-volatile non-financial measure at its highest since 2007, before the recession – see chart. The message is clear – consensus gloom about UK economic prospects is wildly exaggerated and data should continue to surprise positively in late 2012 and early 2013, to an extent that even media perma-bears will be hard-pressed to deny.

Chinese monetary trends signal a recovery in the economy in late 2012 and early 2013 but growth may remain below-par by recent standards.

Chinese analysts, like those elsewhere, tend to focus on credit rather than money, while preferring the broader M2 measure to narrow money M1. Real (i.e. CPI-adjusted) M1, however, continues to outperform as a leading indicator, as it has in a wide range of countries. A contraction in real M1 in early 2012 signalled recent economic weakness, even as bank loans and M2 were growing respectably – see chart.

Real M1 has revived since mid-year but six-month growth in September was moderate rather than strong – 4.2% (not annualised) versus an average of 6.1% since 2005. Pending further improvement, China may lag the global economic upswing expected here on the basis of monetary trends and recent leading indicator data – in contrast to 2009, when a Chinese boom drove a V-shaped recovery in world industrial output.

UK consumer price inflation remains likely to rise above 3% in early 2013, triggering a final exculpatory letter from the Bank’s Governor before his departure next June.

A post in August suggested that CPI inflation would bottom at 2.1% in September before rising to 3.1% in January, with the increase due to a combination of energy and food price rises, higher undergraduate tuition fees and sticky “core” inflation. The Office for National Statistics yesterday reported September inflation at 2.2% (or 2.15% comparing index levels last month and September 2011) and recent news has warranted only marginal adjustments to the assumptions underlying the earlier projection. An updated profile is shown in the chart – CPI inflation is forecast to average 3.1% during the first half of 2013.

The view here remains that the government should exclude the tuition fee boost to the CPI when uprating index-linked benefits – recipients of such benefits are not affected by the fee increase so do not require compensation. A post in April 2011 argued that as much as 40% of the money raised from higher fees could be absorbed by increased inflation-linked spending, representing an unintended and unwarranted transfer from students to pensioners and other benefit recipients.