The UK inflation indices remain largely unchanged this month, there being a similar increase to last month, and they remain higher than those on any of our G7 competitors. This is a trend now well set in – but largely unmentioned in the UK media.

The BBC 24 coverage of the inflation figures this month was only untypical in giving it a bit more time than other media. Besides over-simplifying the differences between the Consumer Prices Index and the Retail Prices Index, they brought on a banker to tell us that the inflation registered was not really important and that we need to keep interest rates at their record lows and may need to print more money. This is the usual banker position on inflation.  The low interest rates (paid to savers) and the printed money are the only things that have brought them back into profit, even while few other businesses are. The BBC’s own experts never challenge them on this.  This month the banker pushing their cause was HSBC economist, Bronwyn Curtis.

The main inflation figures for the G7 can be found at the foot of this report.

At the end of the 1990s Digby Jones, the Confederation of British Industries (CBI) West Midlands regional chairman, became the only such regional chieftain to ever become the national CBI leader. West Midland’s manufacturing was on the ropes during the very first years of the New Labour government, with the newly independent Bank of England. The Pound, according to DJ, was overvalued because the Bank of England’s interest rate committee was keeping interest rates high in order to surpress house price inflation in London and the south.  DJ was implying that inflation generated in the south was being taken on by the bank at the expense of manufacturing further north.

 

In our July report we outlined how we thought real inflation had had a dramatic effect in the UK in the New Labour years. We pointed to how it now takes two incomes to run a household that could be run on one income a generation ago. We borrowed the term the ‘Two Income Trap’ used in the US by the Harvard academic and congressional advisor Elizabeth Warren.

In the UK we asserted that this had come about because of the average price of housing doubling in terms of incomes under new Labour. This can be seen in how before the crisis of 2008 those average homes cost  between 6 and 7 times  average incomes, when they had been about  3 times income when New Labour came to power. This sort of inflation had not been addressed because, unlike in many other countries, it is not reflected in our inflation indices.

In our July report we pointed out how in the West Midlands this two income trap had been emerging earlier during what has been  called the ‘Lawson boom’. This  occured in the last years of Margaret Thatcher’s government and peaked when the UK had to withdraw from the European Exchange Rate system in 1992. Nigel Lawson her Chancellor lost control of inflation in those years. He had been secretly adjusting interest rates in order to keep the Pound in line with the Deutsch Mark. It was later referred to as ‘shadowing the Deutsch Mark’. This was a policy that led him to disaster – during which people in the West Midlands got a taste of what the Two Income Trap held in store.  They have since associated this with the Tories, even though real housing costs fell back here under John Major and Ken Clarke.

In his memoirs Lawson recounts how he had lost faith in the deeply flawed Retail Prices Index. This was the context in which he started to shadow the Mark. He was effectively relying on the German system to detect inflation and following their lead. Hence he was reacting to international prices rather than to our national prices. Lawson never thought of reforming the UK inflation indices. Had he begun to learn from most of the other G7 countries he would have been thinking of regional inflation indices and indices based on different parts of the social spectrum such has key workers and pensioners. Our last report detailed the most instructive lessons from the rest of the G7.

Had Lawson even had an experimental index for even one of the regions or nations of the UK, he would have served the interests of our UK economies better than any shadowing of the D-Mark could have done. Had that region been the West Midlands or a wider midlands area it would have most clearly alerted him to the Lawson boom being out of control. It could then have been reined in before  it both led to the crises that squeezed our manufacturing industries so badly in the early 1990s, and blighted his party in the midlands.

Had Gordon Brown as chancellor had regional indices, a West Midlands index that included the sort of weight for housing that one finds in other countries, it would have alerted him to the underlying inflationary dynamic in the UK economy. This is clear in the cost of housing in relation to incomes in the West Midlands. Despite the fact that our manufacturing employment was in the serious decline that Digby Jones highlighted, house prices in income multiples in the WM stayed closer to the London figure than the national average of  5.86.

An inflation index for the West Midlands that gave appropriate weight to this, as they have in the localities of Germany and the USA, would have served to show there was a problem emerging. Even if that emergence was only yet clear in the West Midlands. The middle was being ‘squeezed’ – as Ed Miliband might say.

For the last couple of decades politicians of all parties took more interest in looking after the economic comfort of the ‘wealth creators’.  However, with the recent General Election, this may have changed. The bankers are now denounced right across the political spectrum and the parties are fighting for the support of the middle that is squeezed. The UK Statistics Authority is curently having a review of the current UK inflation indices. We have pressed them to clear the way for the establishment of indices that will allow the politicians to get their fingers on the pulse of the price shifts as they affect key parts of the social spectrum. For our part of the UK we thought the following set of sub-indices would serve.

We hope to hear within the month about how the Statistics Authority see the inflation indices being developed.

 

Andrew Lydon

Regional Prosperity & Inflation Project

The comparable inflation figures when this report was written were

United Kingdom            3.1 %

Canada                          1.7  %

France                          1.6 %

Italy                               1.6  %

Germany                          1.3 %

USA                                1.1  %

Japan                            -0.9 %