Alternative Inflation Report – better indices under consideration…better policy possible

Our reports in the last half of 2010 have underlined the trend for the UK to have the highest level of official inflation among the original countries that founded the G7 – the leading western nations. The figures for when this blog was written are at the foot of this report. Further, the UK is the only such economy whose rate of inflation is well above the 2% level that we take as our target. Indeed UK inflation has been above this 2% for most of the last 4 years.

Against this background of a specific UK failure in containing inflation, the highlight of this month’s report will be the news from the UK Statistics Authority about potential new developments in indexing inflation in the UK that respond to the problems we have been highlighting in previous reports: problems on which we have been lobbying them.

This month’s UK figures have been edged even higher than last month by rising food and clothing prices. Cotton has been a fairly recent addition to the range of resources whose prices have been driven up by the population and environmental pressures that we at LWM have tended to call the Global Price Shift. Such pressures are having their impact on all countries – even Germany is now feeling them. However,  the other G7 countries are better placed to deal with them, given that they have not already had price problems for 4 years.

News about possible better new inflation indices

It is in this context that we have been lobbying to improve the way inflation is registered and measured in this country, with a view to having government better organise the UK economy to deal with the price pressures that are in large part inevitable against the background of the Global Price shift. At the beginning of December the UK Statistics Authority anounced the outcome of their initial review of the UK price indices.

The Authority has told the Office of National Statistics that they should set out a clear official position in relation to developing regional consumer price indices. They should also consult users to assess the demand for supplementary price indices for different household types. These are both the critical issues for improving the poor UK counter-inflation systems that we pressed upon the Statistics Authority. Our October report outlined how we believed that proper regional inflation indices would have prompted a proper response to the bouts of inflation that inflicted damage on the UK economy in the Thatcher era under Chancellor Lawson.

The Statistics Authority have told us ” The Office for National Statistics is ultimately accountable to the Authority on these matters and we do expect these two points to be addressed. The Authority Board will monitor  and report on progress but the question of the timetable is for ONS in the first instance.” With few expecting the UK target inflation rate to fall below even 3 % throughout 2012, we believe that this period should prove to be one where these longstanding weaknesses in our counter-inflation systems can be addressed.

Getting the political parties to focus on …

Backbench MPs  have called for reform. The Authority’s report cites an Early Day Motion put down by the Birmingham MP, John Hemming, that arose out of our exchanges with him. The main political parties should now be more receptive to what we are suggesting since the coalition insist their slogan is ‘We are all in it together’ and Ed Milliband wants his party to respond to the eroding position of the ‘squeezed middle’. In 2011, we will be pressing both front benches to grasp the opportunity for political change that having fresh new economic statistics will provide.

We also welcome the Statistics Authority’s  suggestion that the ONS consider reinstating some international comparisons in the Consumer Price Indices statistical bulletin. Should they do this, and make the relevant comparison with other G7 economies, they will be highlighting the UK-specific problem that we highlight every month in this report – but which otherwise passes without comment. This would alert the public to something we definitely feel they need alerting to. So we welcome the Statistics Authority’s suggestions on all these points.

The price of inflation

One of the more alarming comments one hears from among the more flat-earth economists is the hope that inflation might erode the burden of debt that many G7 economies now carry, and especially the UK. This attitude of complacency or ‘benign neglect’ of inflation would be dangerously misguided. Our fear is that given the weaknesses in our counter-inflationary systems, the ‘benign neglect’ stance might be used to cover for the impotence of the existing UK system and its leaders.

Complacency towards inflation is a very dangerous policy. One of the most recent examples was Russia in 1992 immediately after the collapse of Gorbachev’s Soviet Union. Prices were allowed to rise suddenly as part of what was known as ‘ shock therapy’, to shake off what was left of Soviet practices in the Russian economy. However, the crucial parts of the Russian population, like elsewhere in the developed world, had ‘savings’. They did not appreciate the big new 100 Rouble notes whose value eroded like never before.

The political reaction swept away the western-orientated ‘liberal’ economists that surrounded President Yeltsin at that time. It would be a strong man from the security establishment who would ultimately then take power in Russia, and any potential the Russian economy or society had to orientate itself towards the ‘West’  was snuffed out. This is a far more recent and relevant example than the oft-cited Weimar Germany of the 1920s, where hyper-inflation led to a not dissimilar outcome.

Even the US is paying the price … already

There are few other examples in the developed world of where inflation might have been neglected, and none that did not have a disastrous outcome for the political strata that neglected it. Some might argue that the USA got away with allowing popular living standards to be eroded over the last generation. But in reality the same dynamics are occuring there, but much more slowly.

We wrote about how it was Ronald Reagan’s perceived stabilising of that fall in living standards that gave him his remarkable two Presidential terms, at the expense of both the Democrat and Republican groups who presided over the 1970s inflation. But the dynamics are still being played out today, in terms that are very relevant to our British situation.

President Obama wrote about the Two Income Trap in the book he wrote in launching his presidential bid. This need for a household to have two incomes to run a household that could have been run on one income in the 1960s, was how the inflation fostered by the Cold War and the Vietnam War had been felt in the American home. We refer to this problem in most of our reports, and so will say no more of it here. However, Obama did not really suggest how this might be addressed in the US, and the fact that families had become so stretched in the US over the last generation probably explains the impatience and disillusion with Obama in the face of things continuing to go in the same direction. The rise of the Tea Party suggests an increasing reaction against the modern US political system.

The situation in the UK is not so dissimilar to that on the other side of the pond. The UK is already a very angry and disillusioned society, where even now princes need to be very careful even driving down Regent Street.

Our last report opened with a critique of the Bank of England that is now one of many that are emerging. Future reports will pick up our criticisms of the BBC coverage of inflation and reservations about how the UK authorities plan to register housing inflation in our inflation indices.

The figures for November 2010  inflation current as this report was drafted were:

United Kingdom                  3.3 %

Canada                            2.4  %

Italy                                1.7  %

France                             1.6 %

Germany                           1.3 %

USA                                 1.1  %

Japan                               0.2 %  

Andrew Lydon

Regional Prosperity & Inflation Project