Our main concern this month is how the UK can deal with the inflationary impetus we are suffering because of energy prices.

We will also outline the most recent inflation figures from our most  relevant counterpart economies in the historic G7.

We will also briefly refer to our high interest rates by comparison to Europe, when our official interest rates are supposed to be half  those of the Eurozone.

Energy price shock

Domestic energy prices have long been one of the main drivers of the cost of living pressure in the UK. Recently Ofgem has finally began to notice this and begun to pressure the ‘Big Six’  energy companies that dominate domestic energy in the UK.  We at LWM began to highlight this cartel 3 years ago during the price hikes that preceded the financial crises.

The Big Six’s generating assets are overwhelmingly fossil fuel and nuclear plant. In having to start using wind and other renewable energy plant, they have done this in such a way as to complement rather than displace these older assets. For example, it is easier for them to turn off wind turbines when there is more than enough electricity being generated, than to turn off nuclear or gas fired generators. This means the renewables who should be unaffected by the oil and gas price hikes, help the economics of the old plants,  rather than aggressively displacing the increasingly expensive old fuel sources from the UK energy mix through under-cutting them.

We have suggested that in looking at competition in the UK energy market, the Competition Commission should look at an arrangement whereby the Big Six have to let their renewable divisions have a free hand to compete against the old plants in the energy market. In the media market for instance, Rupert Murdoch has felt compelled to offer to allow Sky News independent management within BSkyB, to persuade the Competition Authorities to allow him to strengthen his hold on the broader BSkyB.

 The Big Six have a position in the UK energy market that is strong enough to be regularly abused. Four of the Big Six are continental owned. Electricité de France has in recent years made more profits in the UK market than in France. This is because they have to get government permission to increase prices in France. Their UK profits help fund French price restraint. RWE (who own npower) and E.on don’t have a cavalier attitude towards passing on price pressures to their customers at home in Germany, because half their main boards are made up of representatives of their German workforce. In the case of RWE a number of German mayors also sit on this board. What we published in 2008 can be found here.

Getting the Pound Right

Our previous report explained how pressure on energy prices would also be eased if the Pound was encouraged to strengthen in value as a result of  savers and exporters in the UK being offered better interest rates to save and hold money here.

Despite savers getting poor interest rates, UK home buyers are being charged higher interest rates than their counterparts either in Germany or in some of the supposed sick economies of Europe.

Our previous report went into this in more detail and illustrated savings rates. We argued that safeguarding the domestic purchasing power of our own population was the best way of safeguarding the UK economy. The manufacturing sector is now so small, less than 10% of employment, that any so-called export-led growth cannot be expected to help employment like it did in the 1990s.  That report can be found here.

 

Getting inflation in proportion

Other major G7 countries manage inflation better than we do. They measure it better. They measure it as it impacts upon different parts of their countries and social structure – something we want to see done here in the UK and are currently pressing for. In other countries this has allowed inflation to be long-term suppressed by more painstakingly proportionate decisions.

The USA gives out the most comprehensive set of inflation figures every month. In February the CPI-U, representing the broad urban population, was  2.1% .  But they also give a CPI-W figure for ‘urban wage earners and clerical workers’ which was  2.3 %.  But they don’t just give a national figure for each of these populations. They also give a CPI-U figure and a CPI-W figure for most of their big cities and the US census regions.

This has made the USA very sensitive to emerging inflation and has prompted the USA to be one of the world’s lowest inflation economies.  A worker in Chicago and the Mid-West knows whether his prices are rising in line with the official figures for his area, in a way that someone working in Birmingham, England cannot because we only get a couple of different national disembodied averages for our official figures. So if the US figures are out of proportion with what workers are finding in the American cities the figures can be challenged in a way they cannot be in the UK.

A slightly more detailed outline of how the US inflation indices (and the other overseas systems outlined below) have both evolved and worked can be found in our report of September 2010 here.

France also has an index that is intended to represent the total population as well as one that represents what is called an urban household  headed by a worker. It is particularly used for adjusting the minimum wage. For France  inflation was    1.7 %  for the main population in February and 1.6 % for the worker’s household. Until the 1960s France used to only calculate an inflation rate for Paris and say that that was the French inflation rate.

The Italian indices for registering inflation are today pretty much identical to the French system. In February the inflation rate for the broadest population was  2.4 %, and 2.3 % for workers’ families. Unfortunately the Italians no longer translate their full monthly release. It can be deciphered with only a basic French/Italian at the link here. The big cities all each have a separate published figure.

German inflation for February was 2.1%. Germany now only does one figure for the broad population of Germany. But most of the large federal states have produced a figure for their own local population since the 1960s.

The State of Hesse, which is home to Birmingham’s twin city of Frankfurt, had a February inflation rate which was slightly lower at 1.8% (and they have already published their figure for March). We also have a twin city in the former East Germany which is Leipzig in the state of Saxony. The Saxon inflation rate was higher at 2.2%.

From what has been shown here of how other G7 countries register inflation, you will be able to appreciate the basis of what we are proposing should become our future UK  framework of inflation indices.

Our report for February, which outlined how the global price spiral had to become the focus of our domestic economic policy, can be found here.

 

Andrew Lydon

Regional Prosperity & Inflation Project