Inflation across the Eurozone at 2.2 % is now above the European Central Bank target of   ‘2 % or less’.  In the big European economies it is now approaching 2 % with little hope that it is going fall back any time soon. The current figures for the big EU countries this report tends to follow are:

Germany         1.7 %

France            1.8 %

Italy               1.9 %

What has been becoming clear in the last few months is that other than in the USA and the UK, the current worldwide price inflation is now being seen as the problem to be addressed.

In the UK our inflation has been above our critical level of the 2 % target (plus 1 % ) for most of the last 4 years. The latest figures being 3.7 % on the least generous measure (Consumer Price Index) and 4.8 % on the more generous measure (Retail Prices Index). Figures  more than double the current US inflation figure of  1.5 %

A global problem now

And across the world, it is being recognised that this sort of inflation can only be addressed locally – economy by economy. The European Central Bank has now begun to react to the problem, but the leading Asian economies had already done so. China, India and now South Korea have recently introduced measures to contain the price rises.

Onions are the most recent food stuff of which India has banned the export. Such export bans have been a regular feature of the last couple of years. They are now  looking to lift their ban on the export of cotton to Pakistan, in exchange for Pakistan allowing onion exports to northern India. This sort of regional ‘bilateralism’ was what globalisation was supposed to stop.

Most of these price crises have been provoked by floods, droughts and other events stemming from  ecological/population dynamics. It is what we at LWM have called the Global Price Shift.  Even the floods in Queensland Australia seem to have driven up the price of coal and steel in Asia.

An explosive problem

The price shift is now also making itself felt in world politics with the current revolts in Tunisia and Algeria sparked by their government’s failure to hold down food prices. The fuel price rise in Pakistan has led to the Zardari government losing its majority.

Just what level of inflation becomes politically explosive depends upon how stretched the household finances already were in particular economies during the recent global boom. However, it seems that price rises more modest that those of past decades produce a more significant response than they used to. And there is no reason to think that this will not hold good in the more advanced countries too. There is also no reason to assume that this inflation is just going to fizzle out any time soon.

Driven by ‘globalisation’

That the price shift is under-appreciated in the Anglo-Saxon countries may have something to do with them trying to forget their old prophet – Alan Greenspan. He was warning that something like this was coming in his memoirs of 2007.

In the final chapter he outlines how in the globalisation that mainly occured while he led the US central bank, bringing China into world markets had made manufactured goods so cheap that it had squeezed inflation dramatically. He predicted that this was now coming to an end, and even suggested that globalisation would now begin to drive up prices for goods, food and energy around the world. At the time many central banks, including the Bank of England also echoed this warning. This is now turning out to be one of the few Greenspan prophesies to come to fruition.

This would make globalisation just too expensive.  And it going into a kind of reverse becomes the cheaper option, as can be seen when so many countries resort to  banning exports.

The solution begins at home

In the UK the main reason inflation has stayed so high, is that the problems were not properly recognised when they were emerging some years ago. And one of the main reasons for this has been that we have had such poor quality inflation indices. We reported last month how the UK Statistics Authority has ordered our ONS statisticians to address some long overdue improvements. The Authority has told them to go into the issue of regionalised inflation indices along the lines used in most other major economies and which we have been lobbying for since 2006.

Scotland merits having an index of its own. But in the interests of  getting things moving we would suggest that some indices based on ‘ad-hoc’ super-regions  would be a good start for England. Just 3 indices for England would be such a starting point, with the regions being grouped something like as shown here for inflation  purposes. But which regions were initially grouped together would need to be the subject of consultation with interests in the regions.

We have begun paying particular attention to the media coverage of the inflation problem. The public BBC has a particularly influencial role and have had particular attention. The main evening news programmes did feature comment from the leader of the TUC. This is unusual and welcome, as too much of the BBC coverage in the past has been dominated by bankers seeking to justify continued low interest rates. Hopefully the quality of the coverage of the inflation problem is improving.

To be covered in future reports

In coming months, our monthly reports will include spotlights being shone on how the cost of owner-occupied housing should be included in a proper inflation index as well as highlighting the unusual role of alcohol in the UK inflation indices.

With this month’s inflation figures we are seeing the Bank of England coming under attack for how badly counter-inflation policy is going. Our critique of the monetary policy system can be found in our  November  report.

Andrew Lydon

LWM Regional Prosperity & Inflation Project