Perhaps one might be forgiven for supposing that, after thirty years of continuing inflation in the United Kingdom, a clear consensus would have emerged among economists, politicians, and men of business as to the causes of that inflation and the steps necessary for its cure. Unfortunately, this is not the case, although the disagreements are often exaggerated for political purposes and the arguments polarized in the sharpness of academic debate. The latest trend in the United Kingdom is to divide the participants into Keynesians and to do battle like mediaeval knights jousting at the tournament. The explanation of prevailing disagreements is in itself complex. It is partly ascribable to the usual difficulties of adequately testing alternative hypotheses against limited sets of time-series data when it is not always possible to reject particular hypotheses against the statistical facts. It must also be said that differences arise that are not so much closely allied to analytical arguments, but which reflect the taste or persuasion of individuals with regard to prescriptions for policy. It is not unknown for positions to be rationalized by subsequent analysis rather than the logical development proceeding in the opposite direction.' In this paper, we argue that the inflationary process in the U.K. economy cannot be simply fitted into either a so-called monetary or a Keynesian framework. The process is a more complicated one that cannot be described simply in terms of the behavior of the money supply on the one hand or the behavior of organized labor on the other. In agreement with the monetarists, it is important to differentiate between the inflationary process under fixed and floating exchange rate regimes, while in opposition to them, we assign a more important role to price and wage inflexibilities in the analysis of imported inflation and the process of adjustment to monetary change.

Accruals are the non-cash component of earnings. They represent adjustments made to cash flows to generate a profit measure largely unaffected by the timing of receipts and payments of cash. Prior research uncovers two anomalies: expected returns increase in profitability and decrease in accruals. We show that cash-based operating profitability (a measure that excludes accruals) outperforms measures of profitability that include accruals. Further, cash-based operating profitability subsumes accruals in predicting the cross section of average returns. An investor can increase a strategy’s Sharpe ratio more by adding just a cash-based operating profitability factor to the investment opportunity set than by adding both an accruals factor and a profitability factor that includes accruals.