Gordon and Inflation
In July 1998, when Gordon Brown announced his plans for a Comprehensive Spending Review, to take place every three years, he promised that this would bring an end to the traditional economic cycle of boom and bust. This unprecedented change to the mechanics of the British economy would be achieved, claimed Brown, by planning government expenditure on areas such as health, education, law and order and defence on a three-year basis. One year later in his 1999 party conference speech, Brown gleefully espoused on the achievements that his policies had already created.
And it is because we rejected not just the Tory policy but the flawed Tory values behind it - their short-termist, take-what-you-can, selfish irresponsibility - and it is because we put in their place Labour values of economic responsibility, planning for the long term, building stability from solid foundations - that we now in our country have mortgage rates around their lowest levels for twenty years, inflation at its lowest level in over thirty years, long term interest rates at their lowest levels in nearly 40 years and not just one hundred thousand additional jobs or 200,000 additional jobs but today in Britain, 648,000 more jobs, more people in work — over 27 million men and women –than ever before in our history.
One of the key factors in a stable economy, of course, is to keep a stable and low rate of inflation. This is certainly one area in which Gordon has been very successful, as the official government measure of inflation has remained around or below the target figure of 2% ever since he took up office over 9 years ago. This success has been made all the more admirable by the fact that it has been achieved in an era of rapidly increasing oil prices, rises in the cost of metals and other raw materials, increases in council tax and a seemingly never-ending property boom.
How has this been done? Has Gordon finally achieved the impossible, ensuring steady growth and an end to the booms and busts of the economic cycle? In actual fact, Brown passed on the responsibility for controlling inflation directly to the Bank of England in his very first act as chancellor in 1997. The Bank’s Monetary Policy Committee is now in full control of any alterations to the base rate of interest charged on all loans and paid on all deposits. Changes to interest rates are the tool which is used to control inflation in our economy, the Bank has the power to raise rates to control inflation, or to lower rates to stimulate the economy in periods of slow growth. The Bank has a target, set by Gordon, to keep inflation at around the 2% mark, and sets interest rates on a monthly basis with the sole aim of achieving this.
With record low inflation at around 2%, there is clearly no need for any drastic calming measures from the Bank. After all, prices are staying low, so everything is under control. But is this really the case? It is often mentioned that certain things such as Oil, Gas, Electricity, Council Tax and Accomodation costs are actually rising far quicker than inflation. How can this be the case? The answer is very simple. Another of Gordon’s clever policies to steer inflation to low levels was to replace the existing measure of inflation, namely the Retail Price Index, with a new measure in 2003. The Consumer Price Index, miraculously, does not include any of the rapidly increasing areas of cost mentioned above, seeking instead to largely concentrate
on the price of food and consumer goods, which of course has been falling in recent times due to cheap far-eastern imports and savage competition between supermarket chains.
Another important use of the inflation figures, perhaps even more so than setting interest rates, is the benchmarking of salaries. The government advises companies to target increases in the wages of their employees to fall in line with government inflation figures, i.e. CPI. This means that most people, unless they are being promoted or changing jobs, will only receive a 2% pay increase every year. The rationale behind this advice is that inflation represents any increase in the cost of living, and therefore for an individual to maintain the same effective level of renumeration, their salary has to increase in-line with inflation.
This method of benchmarking is inherently unfair, as the inflation figures produced by the government on which it is based are a very poor measure of the cost of living. Aside from the reasons already detailed, that the calculation does not include many basic necessities such as energy and housing, there are many other defects in the measure. One such example is the fact that the figures take no account whatsoever of the quality of the goods that they are measuring the cost of. For example, the average price of a loaf of bread has dropped over the past 20 years. But there are many cheaper, lower quality varieties of bread on the market than there have been in the past, and supermarkets have since introduced their own “value” set of products. While the average price is definitely lower, it is unquestionable that the average quality is also lower, and therefore the price that must be paid to obtain a product of the same quality as 20 years ago could very possibly have increased, and certainly has not decreased as much as the official inflation figures show. Another example of a problem with the calculation, perhaps related to the previous example, is that the figures do not take into consideration the rate at which money must be spent by consumers. For instance, a kettle purchased 20 years ago may have cost 50 pounds, whereas kettles can be bought today for as little as 5 pounds, but the expected longevity of such a kettle today is almost certainly far less than a kettle of 20 years ago. Your £50 kettle from 1986 may still be going strong, but it is highly doubtful that your Tesco Value kettle of £4.97 purchased earlier this year will continue to work perfectly up until 2026. In fact, if it lasts less than 2 years, then the price of kettles have in fact increased, despite the fact that the Consumer Price Index will of course show a decrease of 90% in the price. If the cost of housing were still included in the inflation measure, this would be another example. The average house price may have indeed increased significantly in the past 10 years, but in addition to this the size of an average house has in fact decreased. New houses built today are invariably smaller both in terms of bedrooms and square footage than the newbuilds of a decade ago, and yet this fact would feature nowhere in the inflation figures.
In short, inflation is a fiddle, and the value of your salary and the purchasing power of your savings are being eroded day by day far more rapidly than the government will ever admit to.
