It is news to no one that we are living in the toughest economic times for generations. The credit crunch and double-dip recession have pushed household budgets to breaking point.
Today’s report from the Bank of England shows that inflation is expected to rise to at least three per cent by the summer, while yesterday’s Office of National Statistics figures showed consumer prices rising faster than the Bank of England’s target rate for the 38th month in a row.
Inflation is a phenomenon that afflicts everyone. Those on the lowest incomes with the highest marginal propensity to consume find that they can buy less and less. Those who put money aside for a rainy day watch helplessly as the purchasing power of their savings plummet.
Economic orthodoxy followed the Philips Curve, which said inflation was only a problem when an economy was experiencing rapid growth. This allowed policymakers to trade off future inflation against higher levels of growth depending on voter’s preferences.
However, as we saw with stagflation in the 1970s, we are now facing rising inflation alongside the threat of a triple-dip recession. Price levels are rising, but labour market data shows average workers’ wages went up by less than two per cent. For the vast majority of the population this has been the biggest impact of the economic downturn.
The decision to make the Bank of England independent in 1997 revolutionised monetary policy in the UK. The Thatcher government had used monetary policy to manage the economy, but New Labour allowed the Bank of England’s monetary policy committee to focus on controlling inflation, while the Treasury promoted growth through fiscal policy. Prior to the crash this worked extremely well, with dramatic falls in underlying inflation and the longest period of sustained economic growth on record.
Mark Carney, the next governor of the Bank of England, seemed to reject nominal GDP targeting in monetary policy, at his appearance before the Treasury select committee last week. This would have seen the Bank shift its focus from fighting inflation to promoting growth. This is good news as, with the central bank taking on extra regulatory powers, a further diversification of its role could be dangerous in leaving inflation unchecked.
In the past Labour has been a strong progressive force in fighting unemployment, and today our calls for a growth-led recovery offer a sobering dose of sanity to George Osborne’s failed austerity agenda. In the future we should be just as determined to tackle inflation and the problems it causes for families and communities throughout the country. This could include a commitment to balanced budgets or tighter inflation targets for the monetary policy committee, but must start with maintaining the Bank of England’s role in fighting inflation.
The stand-up comedian Kevin Bridges joked that he only became interested in economics when the price of Space Raiders, the famous ‘10p crisps’, rose to 15 pence. I am sure that these inflation figures will make many more people reach for their economics primers.
Rowan Ree works for a Labour member of parliament
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