The best way to get the UK economy moving again is to boost real wages. The best way to do that is to control price rises.
Since 2007 there has been a continuous fall in real wages in the UK private sector. For the first couple of years it was sharp, owing to the deep recession. Thereafter it was a bit less pronounced, and mainly occured owing to persistent inflation. The Uk experienced higher inflation than most of the advanced country economies at a time of Credit Crunch.
The Bank has clearly decided to boost money despite the inflation outturn, taking the view that that can stimulate growth. It needs to worry more about the adverse impact on demand and growth that insidious inflation has on living standards and confidence.
Anyone who saves has some of their money stolen by inflation. It can make them even more cautious about spending, as they perceive the need to have more savings to make up for the erosion of value of their money. Anyone relying on work income can find their family budgets become very stretched by price rises. The public sector has increased people’s fears on inflation by indexing many more things to the CPI instead of the RPI and refusing to issue any more National Savings Index linked bonds.
The government is part of the cause of the inflation. Energy prices have been especially troublesome. Both the Labour government and the Coalition government have followed policies of taxing energy more highly and pushing up energy prices in the name of fighting global warming. This has strained family budgets, made UK industry less competitive, and given a great advantage to our competitors in the USA and Asia who have gone for cheaper energy policies.
I have written recently to the Energy Minister, renewing my call for us to follow a lower price energy policy. The recent sharp falls in the oil price will provide some temporary respite, but we need to go much further, and we need to end the extra burden we are having to pay. That means ending the carbon tax, generating more electicity from lower cost options, and exploiting more of our natural resources.
The government has also been keen along with local government to put up fees and charges across the public sector. It would be good to have a two year freeze on all public sector managed prices, allied to requirements that the public sector should not simply raise the subsidy needed for these activites on the grounds that they cannot raise their prices. They should be required to become more efficent instead.
The new Governor of the Bank should be told to renew the inflation target, and told that he should be setting out to hit it soon. The latest fall in world commodity prices, and the current little rise of sterling can help bring this about. Lower inflation would be great news for recovery, and for confidence in UK policy generally.