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The reality of inflation
In February, when the Bank of England launched its quarterly Inflation Report, Governor Sir Mervyn King said: “We said that inflation would come down. It is coming down.” Unfortunately for him, and everybody else in the country, it has just gone back up again, with CPI rising from 3.4% to 3.5%.
In itself, it is not a big rise, but the “experts” all told us that inflation would, by now, be headed down towards the government’s 2% target. No doubt we’ll soon hear the usual barrages of excuses claiming that this month’s figure is in some way abnormal and that, if we just wait long enough, that much-delayed inflation figure will finally be reached. How much longer before they admit that we’re as likely to see pigs in flying goggles soaring through the skies above us?
Next month sees the 15th anniversary of the establishment of the Bank of England’s Monetary Policy Committee. It was, of course, charged with setting base rates to keep inflation at the Government’s announced target. Initially it fulfilled its role successfully, though admittedly in a period of modest UK growth rates, a strong pound and flat world commodity prices.
More recently the MPC has taken a more relaxed attitude to inflation. It has now been above target for 28 consecutive months. In fact, the target has only been met 10 times in the past six years, a failure rate of 87%. Although the first “Sorry, we missed it” letter from the Governor of the Bank of England in April 2007 was to Chancellor-about-to-be-Prime-Minister-Brown, the MPC was not admonished, despite the fact that it was Brown who had set it up. Ever since, as more and more “Sorry, not this time either” letters have winged their way from Threadneedle Street to 11 Downing Street, not one Chancellor has even wagged his finger admonishingly at the MPC for failing to meet the target. It has become a joke, though not for the people suffering inflation’s effects.
Inflation is a social evil
As the Alliance Trust Economic Research Centre has just shown, inflation is felt most keenly among the less well-off. This was also the conclusion of the Institute of Fiscal Studies last year, which found that “poorer households have experienced higher inflation on average than richer households over the past decade. This difference has been especially marked since 2008 (during the recession) when the poorest fifth of households faced an average annual inflation rate of 4.3% whilst the richest fifth experienced a rate of just 2.7%.
As we will all soon no doubt be digging out our bunting to celebrate the MPC’s anniversary, we thought it timely to look at what has happened to inflation in the 15 years since it was set up. There are, of course, two different widely-used inflation measures. The more new-fangled Consumer Prices Index, which cynics say is used whenever the government has to calculate what it has to pay out, and the more traditional Retail Prices Index, which is higher and which tends to be used if the government wants to take our money.
As measured by the CPI, prices have risen 36% since May 1997. The RPI, however, gives a figure closer to our everyday experience of prices. That has risen by 53% over the period. In other words, what you could buy for £100 in May 1997 you now need £153 to purchase. Looked at another way, in 15 years the pound has lost a third of its purchasing power.
The reality of inflation
What about the prices of individual items? The soaring cost of petrol is a commonly-heard concern. A litre of unleaded petrol has more than doubled from 60p to an average of £1.42, a rise of 137%. To those with long memories, even more shocking is the realisation that that is equivalent to £6.45 a gallon.
We researched a range of foods that would be in the average shopping basket. While milk has only gone up 31% over the period and oven-ready chickens 36%, the vast majority of items we checked show much steeper rises.
|Cheddar cheese (kg)||£5.35||£7.95||49%|
|Pint of Bitter||£1.62||£2.75||70%|
|Dozen size 4 eggs||£1.38||£2.75||99%|
|New potatoes (kg)||£0.70||£1.52||117%|
|White fish fillet (kg)||£5.48||£12.92||135%|
|Sliced white loaf||£0.52||£1.23||137%|
|Unleaded petrol (LT)||£0.60||£1.42||137%|
Set against steep food and fuel rises, of course, are other things, such as technology and clothes, which have gone down in price as a result of improved productivity, innovation or overseas production using cheaper labour. Given that we become steadily ever more efficient at producing almost everything, perhaps the important question to ask is not why inflation is still so strong or why so many essentials of life have risen faster than RPI, but why so many prices seem to rise as a matter of course.
Why must prices always rise?
The Bank of England appears utterly petrified of falling prices, presumably believing that consumer demand will stop dead if people knew they could buy things more cheaply in the future. But knowing prices will be lower later doesn’t stop us buying gadgets such the latest i-thingy. It surely wouldn’t stop somebody buy a new pair of shoes if their current pair wore out. Wouldn’t gently falling prices work wonders for consumer confidence, making us feel a little wealthier instead of blanching at prices that make us feel much poorer with every beep of the supermarket scanner?
Still Sir Mervyn King professes to worry about deflation and to believe that inflation will fall. But then he is, after all, the one person who has attended every single meeting of the MPC. He may also be the only person to want to put on a silly hat and blow a silly squeaker to celebrate its anniversary next month.
We have recently seen much discussion about the fairness of economic policies. The inflationary policies of the MPC, tacitly approved of by successive Chancellors, have clearly been grossly unfair to the least well-off members of society and the more elderly, to whom food and fuel make up a larger proportion of their outgoings. It is hard to argue with the Guardian, when it concludes that: “Well-off households were the main beneficiaries of the Bank of England’s decision to slash interest rates from 5.5% to 0.5%.” They were. And they still are.
Inflation is harming our growth prospects. Consumer spending accounts for two-thirds of Britain’s economy. Yet, with most people feeling the pinch, they are thus much less likely to open their purses or wallets. Or, if they have any sense, to believe anything that comes out of Sir Mervyn King’s mouth.