Getting across the fact that the UK has a consistently higher but also very unrepresentative inflation rate, was the reason we started these monthly reports. This would reinforce our case for making our UK inflation indices more representative.

But in doing this we also found these reports could also highlight issues about interest rates and the exchange rate that became increasingly clear to us from research connected to our Prosperity & Inflation agenda. With a far better public appreciation of the inflation problem now, the time has come to widen our focus.

Given that interest rates will probably have to be amended in coming months, now seems the right moment to shift the time when we circulate our monthly report. Up till now we have circulated it either just before or just after the monthly inflation figure is released. From now on we propose to circulate it just before the Bank of England meeting on interest rates, so we can provide a context for people to judge what is going on or not going on.

Britain’s strange economic debate

However, we cannot wait until next month to encourage readers to look at the real facts about UK interest rates. Most other commentatators keep going on about our rates being at record lows and lower than those on the continent. But this is not actually true. The following chart shows the change in average mortgage rates in the UK.

This chart comes from the European Central Bank who produce it from figures sent to it by the Bank of England. It can be clearly seen that despite the Bank of England’s policy rate,  the average interest rate has not fallen since before the crunch and  crash. It has actually edged higher. If one needs to be reminded what a fall would look like, one can look to the German rates over the same period ( in the chart below), despite the European Central Bank’s policy rate being twice what ours is.

We began to highlight this in our March report. Where we also compared the current rates in a number of other troubled economies.  We would be interested in hearing of any other commentators who have noticed this and begun to address the need for change in how we control interest rates in the UK.

Getting inflation in proportion

Anyhow, the overseas inflation figures now out are as follows

In the USA , the CPI-U, representing the broad urban population, was  3.2%  in April.  But they also give a CPI-W figure for ‘urban wage earners and clerical workers’ which was  3.6 %.  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. This latter is particularly used for adjusting the minimum wage. For France  inflation was  2.1 %  for the main population in April and 2.0 % 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 April  the inflation rate for the broadest population was 2.6 %, and also 2.6 % 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 April was 2.4%. 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 an inflation rate which was  lower at 2.1% . We also have a twin city in the former East Germany which is Leipzig in the state of Saxony. The Saxon inflation rate was slightly higher at 2.5%.

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