Ross Clark

Falling inflation marks another nail in the coffin for Project Fear

Falling inflation marks another nail in the coffin for Project Fear
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So, another post-Brexit horror story fails to materialise. When the stock market failed to crash and the economy failed to slump, the continuing Remain campaign hit on another fear: inflation. When the CPI rose in September to one per cent, it was predicted to be merely the beginning of a trend which would see prices surge as a result of the fall in the pound. Instead, the CPI fell back slightly last month to 0.9 per cent.

It may well rise again in the coming months, but it is already clear that it is going to be hard to maintain the narrative of a Brexit-inspired inflationary spiral. At 0.9 per cent, CPI remains below the nadir it reached in the midst of the 2008/09 crisis – a time when many economists were warning of the spectre of deflation. Then, inflation at this level was considered by many to be deeply unhealthy – and was one of the reasons for slashing interest rates to the lowest levels in 400 years, to try to persuade us to spend more rather than watching our money gather little or no interest. Now, Remainers are trying to make out that inflation of one per cent is too high.

CPI could double from here and still it wouldn’t even reach the government’s target. The idea that inflation will reach 15 per cent because that is the extent of the fall in the value of sterling is economically-illiterate. That is what prices would rise by if we imported 100 per cent of what we buy – in other words if Britain did not have an economy at all. While the fall in the pound does influence prices in the shops, it is only part of the picture. Much of what we pay in the shops is accounted for by costs incurred within Britain. The fall in the pound has not affected what shops, factories and warehouses must pay staff based in Britain.

Meanwhile, competition between businesses ensures there is continuing deflationary pressure. Clothes prices fell last month in spite of many garments being made abroad. Prices of hotel stays and non-alcoholic drinks also fell. Factory gate prices have risen, as a result of higher costs of imported materials. But while raw materials are up by 12.2 per cent, annual inflation at factory gates is 2.1 per cent. The discrepancy might partly be a result of firms absorbing some of the increased costs. But it is more a reflection that factories add value to the raw materials they import – it wouldn’t be much of a business that had to raise its output prices by 12 per cent because raw materials had risen by that amount.

Another reason why factory output prices won’t rise by anything like 12 per cent is that firms who export have just received a huge shot in the arm in the form of increased competitiveness. If you are selling more products abroad you can afford to limit price rises for British consumers.

Remainers argue that inflationary pressures created by a fallen pound have yet to feed through, but the same is true of the effect on increased sales abroad. You can expect next year a series of good company results in the manufacturing sector as improved competitiveness feeds through to more sales and higher profits.