Whilst being heads down with the Fair Tax Mark I had failed to notice an article with the above title from Martin Wolf in the FT, yesterday.
His argument is straightforward in is claim: he says the risk of low inflation or deflation is much greater than the risk of inflation in the UK economy both now and for a long time to come, and that restoring even modest growth is the simple answer to paying off debt, which would then happen without difficulty or stress.
He's right, of course. Completely right.
And that's why any government in this country should be investing now to create full employment. It will, as a matter of fact, pay for itself.
On the other hand, cuts doom us to financial stagnation and worse. Read the full article here - and you can register for the FT for free if you read selectively.
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Are we *sure* that inflation is low?
It seems to be that on average it is: luxury goods and domestic servants are definitely getting cheaper; manufactured goods, less so – China has a bit of wage inflation but not much; and all the things that are necessary to life are getting more expensive – rent, transport, food, health care, legal services.
There’s no wage inflation here – quite the opposite – but the purchasing power of an hour of labour is declining, even if the purchasing power of a pound is not.
I think that inflation is severe for people on low incomes and quite real – as in 1970’s declines in purchasing power – for middle-income households.
Just because it isn’t monetary inflation, doesn’t mean it isn’t real.
Wages have fallen, of course
If you look at inflation by income level, it become clear that there has been signficant difference between the lowest decile and highest decile, with the poor having borne the brunt of inflation. And looking at inflation by category, it is evident that the basic necessities of life have inflated significantly more since the financial crisis, with food, alcohol, housing, transport all up about double the rate of overall CPI. Just looking at CPI is probably relevant for 10% of the population, given that some of CPI weights look ridiculous. How many households spend just 11% of income on food, while spending 13% on recreation and culture and 11% on restaurants and hotels? Vey few I would guess outside the top 10% income earners.
I think Paul Krugman, the Economics Noble winner, has been saying the same.
One problem with inflation is that nobody trusts the official figures. If you are a wealthy homeowner, with a mortgage, who travels by air several times a year and upgrades white goods frequently, inflation is pretty low. If you spend a large proportion of your income on fuel and food, inflation is much higher.
But of course the real problem is, as you say, that if nobody is spending money because they are in debt and their wages are dropping in real terms, then economic growth is hard to come by. The current plan appears to be to have our entire economy funded entirely by a few Russian oligarchs and Saudi princes living in Kensington. Which is, if nothing else, novel.
I never understand why some on the left are so keen on a bit of inflation. Danny Blanchflower is a famous advocate of “5% inflation for 5 years” to deal with the debt “problem”.
Haven’t we seen with this week’s data on real earnings that inflation has a huge negative impact on living standards.
High inflation is great for those with large mortgages. It is ok for those in professional jobs who are able to secure regular pay rises. It is however a disaster for those on fixed incomes (pensioners), those on benefits and those on low pay.
The alternative to austerity isn’t higher inflation. The last few years of high inflation, largely imported inflation through a weak currency and higher oil and gas prices (and higher VAT), have actually detracted from growth, not boosted it.
We also believe in inflation busting pay rises as the way to deliver the inflation
Indeed, Richard. I think DavidB is right. Provided the poorest are protected by commensurate rises in minimum wage and benefits, inflation is a simple and perfectly legitimate way to cope with the debt crisis. But at the end of the day, if this cannot succeed then a debt jubilee must come.
There are no people on “fixed incomes” unless we choose to make it that way. The breaking of the link between benefits and inflation is recent and regressive. Most people on low pay also get benefits and participate in upratings. Strong trades unions are the way to deal with any adverse effects on average workers
That inflation is not the same for everyone is obvious: how it is measured is also a political decision.
Inflation is a good thing for those with debt, and private debt is a problem for most of the middle income group: it is ok for poor people so long as their income is linked to inflation. It is a tax on wealth, for the most part. Since the wealthy refuse to pay ordinary tax I cannot get excited about that: after all they are the “wealth creators”: if they don’t want to pay tax in the form of inflation let them get out there and do entrepreneurial things with the dosh.
The obsession with inflation is a great example of how the rich have persuaded the rest of us that their interests are our interests: they are not.
Hyperinflation is a problem: ordinary levels of inflation are a good thing so long as we recognise the need to protect the poor as we have traditionally done. Most folk will benefit from a reasonable level of inflation and that includes the middle income group who have somehow been misled into thinking that falling wages are necessary to pay of government debt, and act against their own interests time and again.
It is my understanding that QE here and in US has exported inflation to the BRICs by borrowing at practically nil interest from central banks and buying up and lending (at high interest) for the BRICs’ resources, especially land.
have you got any links in relation to this carol? – I’d like to read more. Thanks
I’ve just found this link http://www.investmentandbusinessnews.co.uk/economy/the-end-of-qe-and-the-brics/5024. But I read about it in FT last year.
The other great advantage of inflation is a more important role for trade unions in our society, which is something we all want.
With a good dose of inflation (and the need to renegotiate wages fairly regularly), they will have plenty to do. This will give more work to union officials, which is important in these troubled times when there isn’t enough work.
Also, it should be a boost to their membership – who would dare stay out of a union when there’s inflation?