The mugger’s accomplice
‘Inflation,’ Ronald Reagan declared, ‘is as violent as a mugger.’ In response, the world pursued zerotolerance policies for two decades, to the point at which politicians and central bankers began to believe they had actually eradicated the menace. When Gordon Brown used to boast that there would be ‘no more boom and bust’, he was relying in large part on a belief that inflation had been permanently defeated by monetary and fiscal prudence combined with globalised trade.
But now we know that inflation is on the loose again, and all the more frightening for being unfamiliar. The Consumer Price Index (CPI) stands at 3.8 per cent, a 16-year high and almost double the Bank of England’s target. And the CPI itself (which excludes housing costs, and includes in its basket a selection of consumer goods that no one needs to buy every week) is now exposed as a wholly inadequate indicator of the real rate at which household bills are rising. One former chancellor, Sir John Major, said this week that ‘inflation is probably between 8 and 10 per cent’. The British Retail Consortium puts food price inflation at 7 per cent, while a survey of supermarket products this week put the figure as high as 21 per cent. Fuel costs are up by more than 30 per cent, and sure to rise further.
Until recently, it was the middle classes who complained, across lavish dinner tables, that service-sector inflation was hitting them far harder than general inflation for the mass of shoppers. That situation has reversed: the poorer the household, the higher the proportion of income that is spent on expensive necessities, and the smaller the balance left for discretionary bargains: the poorer you are, the higher your personal rate of inflation. So the mugger is back, his victims are those least able to defend themselves, and voters who see their spending power and the value of their savings rapidly eroded will demand to know who let him out.
These are not easy questions. As for culpability, there is an extended line-up of suspects. If we accept Milton Friedman’s view that inflation is ‘always and everywhere’ a monetary phenomenon, then first in line are the central bankers, led by Alan Greenspan, the former US Federal Reserve chairman who stands accused of pumping out too much cheap money to avert crises during his tenure, and encouraging others to do likewise. The same has happened, under Greenspan’s successors, in reaction to the credit crunch: central banks had to choose between inflationary monetary actions and systemic financial collapse. Not surprisingly, they chose the former, and one result is higher prices.
Next in the parade are the speculators. Behind the inflationary spike is a bubble in commodity prices — in oil, metals, grain and dairy produce. Arguments are advanced that prices are driven by real-world imbalances: in particular, by the appetites of China and India to fuel rapidly growing industries and feed increasingly affluent populations, set against the failure of oil producers to increase supply and the failure of global harvests to yield sufficient basic food. Thus a sliced loaf in Tesco costs more not only because British farmers’ fuel and fertiliser costs have risen and weather has been bad, but because global grain stocks are being diverted to fatten beef for Chinese diners. That may be true, but its effect is hugely exaggerated by hedge funds and others betting with the trend. Opec’s president Chakib Khelil said recently that the last $40 of the $140-plus oil-price spike should be blamed not on his members but on financial specu lation — which translates directly into painful extra pence per litre at the pump. This form of inflationary mugging is the opposite of Robin Hood’s mission: robbing the poor to pay the hedge-fund rich.
Is it fair to include Gordon Brown and Alistair Darling in our line-up? They did not cause the credit crunch or the commodity boom, after all, and Darling as Chancellor can hardly be said to have had any impact on anything. But Brown is the mugger’s accomplice: he misled the British public by claiming inflation was dead and that he helped to kill it; he misled them again by choosing the CPI as his preferred indicator, rather than the Retail Price Index which tends to stand higher; he sowed seeds of domestic inflation with a splurge of unproductive public spending during the second half of his chancellorship; and his government is now so strapped for cash that it cannot contemplate measures to ease the pain such as the Tories’ proposed ‘fair fuel stabliser’.
Brown is in fact no more able to halt inflation today than, despite his claims, he was personally instrumental in keeping it at bay in the previous era. It is for the Bank of England to solve the monetary equation — and that almost certainly means higher interest rates contributing to a short, sharp recession, in turn leading to spare domestic capacity that will reduce inflationary pressures; combined with an inevitable bursting of the commodity-price bubble, that should bring inflation back to its target range two years hence. All Brown can do is to hold a firm line on public-sector pay rises, in the face of increasing militancy from the likes of Unison and the PCS union; we wait to see whether he has the political courage to do even that. Meanwhile, beware: the mugger is at large.
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