On good and bad inflation

Posted on

There are several commentators calling for economic orthodoxy in the FT this morning. Chris Giles for example ( no links today - I am writing in haste and on an iPad) calls for interest rates to rise now because he thinks UK employment is already below 7%, there is no excess capacity in the the economy despite an effective full time equivalent unemployment rate of well in excess of 3 million, and he is terrified of inflation.

This terror of inflation intrigues me. He celebrates the UK's new growth. He ignores the fact that it is based almost entirely on inflation of UK domestic housing prices, putting them even further out of most people's reach, and then demands that what would, in effect, be wage inflation be curtailed to make sure it stays that way.

I think we should have no doubt at all that this demand is not economic policy. This is in a sense not even political policy. Let's call it class warfare, because that it what it is. What he is demanding is that the economy be run for the benefit of the minority who do not see houses as homes but as assets, and he wants to both preserve that asset base for the benefit of the few in this situation and to ensure that those remaining owners can use their increased asset worth as the security for the debt that they owe to that same minority in society.

So we actually have a policy that picks and chooses the inflation it wants. Asset inflation they say is good; wage inflation, they say, is bad.

What this country very clearly needs is the reverse. We need real wage inflation to corrct years of stagnation in the purchasing power of ordinary people and we need asset values to fall, firstly so that people can buy property and secondly because we want a reduction in personal debt - which debt is owed to a small group in society.

So do not for a moment be confused by the demand that we must increase interest rates to beat inflation. That is not true unless the aim is to preserve wealth and income inequalities in society. I want to beat those inequalities. In that case I do want to curb inflation - but it's the inflation in asset prices and debt volume that worries me - and the FT isn't saying much on that yet. More worryingly, when it comes to policy it will be the FT's position that will be considered.

Be worried. Inflation is out to beat you, but not in the way most commentators report.