The high cost of living
Fraser Nelson 12:40pmIn his highly entertaining press conference yesterday, Ed Balls referred to “low inflation.” Today’s inflation bombshell makes such a claim impossible. Against expectations of 2.6% CPI for April, the figure is 3% - the highest rise in six years. This is hugely political. The cost of living is top doorstep issue - so it’s important to establish why Gordon Brown speaks with forked tongue when he blames it all “global turbulence”. Today’s inflation report repays closer examination. My thoughts:-
1) Plunging pound. Since Brown took over the pound has nosedived and is now 12% weaker in general – literally Black Wednesday magnitude. Who’s to blame for that? Opec? Bush? Brown has suffered so many other disasters that no one has commented on this huge inflationary pressure. Factory gate food and drink imports are actually up 15%, so worse is to come.
2) Soaring Food. As Gordon Ramsay will tell you, we import plenty food nowadays – so the currency woes magnify global food price hike for British consumers. Result: CPI food price inflation is a shocking 7.2%. This is what people feel and experience when they head to the supermarket. This will get much worse – as I blogged on Trading Floor yesterday we’ll be in double-digit food price inflation by next year.
3) Services. UK service cost is 3.7% says today’s CPI - yet only 2.8% in the Eurozone. Why so much higher? This is largely a reflection of growing labour costs in Britain. Jack up regulation and employment taxes and this is the result over the long term. As I said yesterday, companies don’t pay tax. Only people do. Service costs shows how regulation is a form of taxation.
4) Tax. Of the 108p a litre petrol, 72p of this is tax. Brown bangs on about OPEC, yet he could bring the UK’s petrol prices (and diesel prices, second-highest in Europe) down with a click of his finger. Americans pay 45p a litre for petrol. That we do not is due to decisions made in Downing Street.
5) CPI v RPI. Let us never forget Brown unleashed a new era of inflation when in Dec03 – the beginning of what I call his “reign of error” - he swapped the RPIX 2.5% target for CPI of 2.0%. It was based on the false claim that the difference between these two indices would be 0.5 points, when it’s twice this. Effect 1: interest rates were set too low, triggering a cheap credit boom and fuelling a housing bubble, now bursting. Effect 2: the media started hoodwinking readers, by using CPI as “inflation.” Since 1948, the public have known RPI as “inflation” which is why no one believes the data now. RPI(X), which one might term “real inflation” is now is 4.0%.
Now and again, Labour MPs ask: how much worse can it get? The answer is: much, much worse. If they think cost of living is an issue now, just wait until next year. And then see who in the Cabinet the public blame the most.
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Comments
Jock
May 13th, 2008 1:27pmWhen global economic conditions were good, everything favourable in the UK economy was due to Gordon Brown - not the global conditions.
Now that global conditions are difficult, everything unfavourable in our economy is due to those conditions and nothing to do with Gordon Brown.
Discuss and explain.
Hugh Gunn
May 13th, 2008 1:38pmYears ago when Ihad to read econimics there was a guy called Friedman who proved the Common Sense notion that if the politicians flood the market with money, then few quarters later people expect it to be worth less. This process has been undeway for quite a while I think. Has anyone got any reliable money supply indices to put my mind at rest.
Mike
May 13th, 2008 1:41pmFraser - where now for Brown and NuLab ?
If you read the commentary and Blogs it's a surprise that Brown has lasted beyond lunchtime. The level of invective and vitriol is stunning. To say he lacks credibility and statute is a massive understatement. Lefty commentators are giving him months, some no longer than the Crewe and Nantwich by-election.
Can NuLab continue like this? When do MPs panic for their seats, income and gravy train expenses and demand change at the top? When does Brown decide that he is damaging Labour and it would be best for him to step aside (as if..)? When does the electoral destruction of Labour and electoral landslide for the Conservatives become so certain as to become a self-fulfilling prophecy? Is civil-war breaking out in Labour. If not, will it?
In essence, is the game up already and Brown might as well start packing.
AlanofEngland
May 13th, 2008 1:45pm"I...blogged on Trading Floor yesterday we’ll be in double-digit food price inflation by next year"...where do YOU shop? I wish I knew, I'm a pensioner and I can tell you MY food inflation is already at about 13% and rising. Thank God for the warm weather, my usual choice of "heat or eat" is suspended for the time being...I saw a reference to Brown, that he is heartless, gutless and brainless...it's all true, and he should retire today!!
Alex R
May 13th, 2008 1:55pmFraser,
Moreover, inflation indices - whether CPI or RPI - don't measure inflation as we or anyone else experiences it.
They can't, because what we all consumer and in what proportions differs depending on our age, wealth, family circumstance etc. Instead they measure changes in a basket of goods which includes all manner of products.
That is why the National Office of Statistic launched its Personal Inflation Calculator. You can enter your own spending habits and it will tell you want your personal inflation rate is.
(http://www.statistics.gov.uk/StatBase/Product.asp?vlnk=14762)
I think for the average pensioner inflation comes out at about 10%.
Of course, what Brown (or no politician) is willing to admit is that we have to accept that as a result of this period of high inflation we will all get relatively poorer. If we try and offset higher prices with higher wages we will only prolong and exacerbate it.
Mervyn King was very clear about this at the press conference launching the Bank of England's last Inflation Report and he will be at the launch of the next Inflation Report tomorrow (Wednesday 10am).
Joe bloggs
May 13th, 2008 2:46pmAbsolutely right, Fraser.
I'm no economist but it all seems fairly straight forward to me:
If the correct inflation measure had been used these past few years the interest rate would probably still be a lot higher than it is now, which would have cooled the housing market sooner and increased the value of the pound, thereby reducing inflation, etc, etc.
Obviously this wouldn't have completely solved the problem, as energy prices would still be high and the housing market would still be causing mild panic.
Such a series of events would have alleviate the suffering though. Unless i'm missing something?
Kevin
May 13th, 2008 2:57pmWhere can you buy petrol for 108p a litre? I paid 110.9p this morning having turned away from the 111.9p on sale at Tesco in Tiverton, Devon.
Fraser Nelson
May 13th, 2008 3:04pmMike, good question and im writing a 1,800-word answer for Thursday's magazine. Joe - you're right. Its not rocket science. Kevin: the garage nearest Brown's house in North Queensferry sells petrol for 108p a litre. Bit of a drive for you, I suspect....
Adrian Drummond
May 13th, 2008 3:38pmI can recall listening to Labour MPS during PMQ's in the late 1990's, chanting "Boom and bust" everytime a Convervative MP tried to speak.
If I was a Tory, I'd be chanting this mantra back at them.
NickL
May 13th, 2008 6:34pmApril's RPIX annual rise was the highest since 1992 - not the basis fore the Government to make claims about low inflation.
The Laughing Cavalier
May 13th, 2008 7:15pmDoes anyone seriously believe that inflation is only 3%?
TrevorH
May 13th, 2008 8:51pmAn increase of the inflation rate from 2% to 3% is an increase of 50%. There have got to be some pretty hefty price rises to cause that.
John W
May 14th, 2008 1:03amRPIX could never be termed 'real inflation' - why the pretense of being economically literate. A 17 year old with an AS in Economics could tell you this. Fraser plunges lower in my estimation (a great felt loss I am sure.)
Jack R
May 17th, 2008 1:41pmIt is typical of Brown's inadequate grasp of economic policy that:
1.)he avoids cutting Labour's uncompetitively high fuel duties on diesel and petrol, which contribute enormously to the weekly increases in pump prices, and eventual rises in unemployment;
2.)he approves orthodox, anti-inflationary, demand dampening policies as inappropriate when inflation derives from the non-wage cost rises in key commodity prices.