A deluge of debt and higher profits are key factors behind the sharp rise in inflation reported yesterday. After ten years in which inflation as measured by the Consumer Price Index (CPI) has stayed within the threshold set by the Bank of England, increasing volatility has driven the rate across the line to 3.1% in March, having risen from 1.8% a year ago. Mervyn King, the Bank’s Governor was duly obliged to write an open letter to Chancellor Gordon Brown giving both an explanation and setting out measures intended to bring the rate back on track. King’s letter sheds a little light on New Labour’s priorities. Part of the rise is attributed to unexpectedly sharp increases in domestic energy prices and part to a rise in food prices caused by a weather-induced global reduction in supply – climate change by any other name. Together these are said to account for around a half of the increased rate. Much of the rest, however, is due to increased spending in the UK economy associated with continuing rapid growth of money and credit. This has given businesses confidence to raise prices and increase profits.
In other words, the expansion of consumption has been fuelled by a rising mountain of debt resulting from deliberate action by the Bank and other agencies to favour businesses starved of profit as a result of increases in the price of oil arising from the protracted war in Iraq. Oil prices measured in sterling have risen 25% since February. King doesn’t say it, but it is the also the rapid growth of money and credit that has allowed house prices to rocket – but this is excluded from the CPI. Other, more bizarre effects of attempts to fuel the frenzy of consumption and boost profits come from the furniture retailers who, according to the Office for National Statistics, raised prices by a record 10% in March - in the lead up to Easter special offers. Cheap tricks to clear cheap sofas. We’ll see how many were tempted in next month’s figures.
As usual, ordinary working people will be asked to pay for the rise in inflation, through higher interest rates that will make mortgage and loan repayments that more difficult. For its part, New Labour will have the support of the Bank of England in holding down public sector wages below 2%. No wonder yesterday’s news on inflation was accompanied by a resounding 95% vote for industrial action over pay at the Royal College of Nurses conference. It would be the first nationwide action since the union was founded in 1916. Nurses’ anger follows Brown’s decision to withhold part of a 2.5% pay award. He allowed nurses 1.5% this month and they will get a further 1% in November. While this move saves the government £60m in 2007/8 it is an effective pay cut for nurses. The public service union Unison is also expected to back industrial action by nurses at its annual conference next week. The GMB union, which represents ambulance workers and auxiliary staff, said 90% supported action to force the government to give the pay award in full from April 1. It looks like Brown’s first days as prime minister could be accompanied by a summer of discontent.
Gerry Gold, economics editor