The general gaiety over Jeremy Corbyn’s leadership obliterated discussion of last week’s worrisome inflation figures. They should have been our first line of attack against the Tory government.
Zero inflation might be assumed to be a good thing by a generation brought up on horror stories of inflationary spirals.
But that is to fight the last war. Inflation now has been flatlining for five of the last seven months, and there is a prospect of getting stuck with deflation such as the situation led to Japan’s lost decade.
The Tory response to the latest figures was risible, and included what we can expect to become a standard attack line on national security. They failed completely to provide any strategy for steering the economy away from the deflationary rocks, or to put pressure on the Bank of England over its repeated failure deliver the inflation target.
Equally we failed to call the government to account over a trend which could spell grinding gloom for many of those hard-working families that we need to win back.
The figures released last week show that inflation has gone back down to zero, meaning that it has been zero or negative for five of the last seven months, and 0.1 per cent for the remaining two months. The two per cent inflation target of which the monetary policy committee is the guardian is symmetrical: theoretically undershooting is as serious as overshooting, although public attitudes work differently as Andrew Haldane recognised in his recent speech.
Beneath the headline figure are differences between prices driven by commodities – especially fuel and food – and those reliant on the service sector, driven largely by local wages. The former are what have pulled the inflation rate down, and the combination has provided a bit of a feel good factor. Food, clothing and transport are cheaper for people whose wages have just started to pick up.
What is worrying is that the Bank has been consistently unable to get inflation back on target. In February, Governor Mark Carney predicted that the Bank would bring inflation back up to the two per cent target by the end of the year. In what has proved to be a dangerously complacent response to the first negative inflation rates for more than half a century, he said that people should ‘enjoy the low inflation while it lasts’.
He could have said, ‘Let them eat cake’ – a rich person prescribing what poor people should do when they cannot afford the basics. The evidence is that when inflation goes down people tend to defer buying in the hope that prices will go down further. More seriously, the Governor is supposed to manage monetary policy, and in its August report the Bank was only predicting it would get inflation back on target within two years.
Meanwhile the government last week said that zero inflation was a reminder ‘that we must continue to work through our long term plan to build a resilient economy … as well as national security of a Britain that defends itself and its values’ – as in leaders of the opposition must always sing the national anthem.
What we are left with is the worst of all worlds. From the Bank of England we get continued quantitative easing which fuels the asset price inflation that makes rich people richer. From the government we get a fiscal tightening in tax credit cuts that make lots of lower and middle income people poorer.
Neither of them tackle the problems of productivity, infrastructure, investment or manufacturing growth which are what we most need to get a more balanced economy, more sustainable growth and provide long-term security for those hard-working families.
Last week’s distraction over the Labour frontbench’s personal and political baggage cost us our chance to take the government to task over the latest figures. But when more normal business resumes after the conference season – this needs to be top of our agenda.
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Sally Keeble is a former minister and former member of the Treasury select committee. She tweets @Sally_Keeble
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I have never understood why deflation or zero inflation is a bad thing. Why is it that +2% inflation is good but -2% deflation is bad? Why is it that Sally Keeble thinks Japan has ‘lost’ a decade during a period of zero inflation. What was that decade and how did we in the UK compare to Japan at that time. Was this the same decade that ‘we will eradicate boom and burst’ (Brown) or was it the same decade when the UK suffered its worst economic recession since the 30’s (Darling). It surely wasn’t the 70’s when the UKs inflation rate peaked at 27% under the guidance of one Dennis (now Barron) Healey of Riddleston.
Is this not a case of whatever the inflation rate is, its bad because it is a Tory government’s rate of inflation.
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Reply to RMackinnon, below. Because not only do consumers put off buying, so reducing growth, firms stop investing and eventually the economy sinks into deep depression. Apart from which, inflation erodes the national debt whereas deflation does the opposite. If you think high rates of inflation are bad, just wait til you meet a high rate of deflation!
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Japans lost decade was the 1990s (the UK’s performance was much better annual growth of GDP per capita was 2.1% vs 0.6% in Japan), and it came after what was a gigantic boom, the Nikkei was at around 40,000, banks were offering 100 year multi generational mortgages and the land on which the Japanese Imperial Palace was located was calculated to be worth more than the entire state of California. Japan’s growth since then has been disappointing it’s endured consistent low growth, low inflation and hasn’t come out of a slump since.
THe problem with low inflation for two reasons, one is that it limits the central bank’s ability to respond to recessions by lowering interest rates. It’s hard to take rates much below zero, with higher inflation the bank can achieve negative real interest rates meaning it has more room to operate to combat a recession. The other reason is that low inflation especially in combination with low interest rates is more generally associated with low growth we can see this from the most recent economic recoveries (in the UK, Europe and the US) which have all been poor by historical standards.