When George Osborne decided to raise VAT, more months ago than he will admit, he did not imagine that he would be compounding the worst inflation in Western Europe. Prices are currently falling in Ireland, flat in Germany and rising only slightly throughout the rest of the Eurozone and America. But in Britain, inflation is back with a vengeance. This week, millions of shopkeepers raised prices by far more than the 2.1 per cent needed to accommodate the new tax. They did so not out of greed, but in preparation for a year of rising heating, staff and transport costs.
The shopkeepers realise what Mervyn King, the Governor of the Bank of England, does not: that Britain is once again in an inflationary spiral. The Retail Price Index stands at 4.7 per cent. The Consumer Price Index will probably soon hit 4 per cent — twice the Bank of England’s target. It has missed this target for four of the last five years. When he fails this spectacularly, King is obliged to write a letter to the Chancellor giving his reasons. But it is perhaps time that someone wrote to him — to explain the basic forces making life so painfully and increasingly expensive for the British public.
It is not difficult to understand. The British government may be in dire financial straits, but the British economy is making steady progress. Manufacturing is growing at its fastest rate in 16 years. Other countries have seen similar trends: Germany is celebrating its strongest growth for nearly two decades; China is buying twice as many British products as it was three years ago. Global growth raises the price of oil, cotton, wheat and metals — and that re-ignites the problem of inflation.
So why is the Bank of England fanning these flames? Why is it keeping base rates at an absurd 0.5 per cent? Yet again, the British economy is being flooded with dangerously underpriced debt — precisely the problem which caused the crisis we are now escaping. Then, the Bank could at least claim to be sticking to its flawed remit of keeping CPI inflation at 2 per cent. Now what is the excuse? For how much longer can high inflation be described as a blip?
It is not a blip. Just one quick shopping expedition would make that clear to the Governor. A pack of butter now averages £1.58, a 34p rise over the year, and potatoes are £1.55 per kilo, up 27p. A rail season ticket from Birmingham to Tamworth is up 9 per cent, to an eye-watering £1,520 for the 20-minute journey. Petrol is 122p a litre, from 108p a year ago. These are the metrics by which millions of ordinary taxpayers live their lives.
Mervyn King seems to specialise in seeing no evil. The Governor did not notice the debt bubble growing the first time around, nor does he seem to notice the new one appearing. But he is not a stupid man, and there may be another explanation. It could be that the Bank is trying to inflate its way out of a debt crisis. If so, we should be told, and King should abandon the pretence of trying to control prices.
Inflation suits politicians: it makes cuts easier, because it means that freezing public-sector pay saves more money in real terms. But inflation, once unleashed, is very difficult to control. Raising base rates may not be popular, but an inflation crisis will be less popular still. Prices, not jobs, will be the greatest economic problem of 2011. It is time someone dealt with it.
The world turned upside down
Poor Australia. They have failed to win back the Ashes on home soil, a catastrophe for a sport-mad people who have been reduced to grumbling about unfair umpiring and cricket’s new decision referral system. To add injury to insult, the Aussies also have to deal with the truly horrifying floods which have all but submerged the state of Queensland. The disaster has already cost the Australian economy more than a billion dollars, and 33 towns have been swamped.
There has been much brave talk of their indomitable spirit pulling them through, but Aussies could forgiven for wondering if the end might just be nigh: thousands of deadly snakes and even crocodiles have, as a result of the flooding, been washed into the streets. A plague of frogs isn’t entirely out of the question and more flooding is expected in the next few weeks. Then the long process of rebuilding and recovery must begin.
Perhaps it might be some consolation to Australia to know that here in Britain, although delighted about the Ashes, we can sympathise with their plight. Appalling floods, a mediocre cricket team, a valiant attempt to muddle on while politicians indulge in futile posturing? That’s just everyday life for us Poms.
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