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Merryn's Blog

Inflation is a tax on the poor

Some commentators have proposed that we should 'inflate away' our debt. That might sound like a good idea, but it isn't. It's cruel and unfair.

Just how long will it be before the Bank of England (BoE) accepts that inflation is becoming a problem? The members of the Monetary Policy Committee (MPC) have raised their inflation forecasts by a tiny bit. But as a group, they are sticking to their story that any spike in prices is temporary on the basis that there is "spare capacity" in the economy.

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BoE governor Mervyn King has just written his ninth letter to the Chancellor explaining why annual Consumer Price Index (CPI) inflation is still so far above his target rate (3.2% instead of 2%). In it, he says that "spare capacity within companies and in the labour market will continue to put downward pressure on inflation." There are two problems with this: first, it clearly isn't; and second, it might not even exist.

As Peter Warburton points out in the Halkin Report, the Inflation Report shows that capacity utilisation in UK firms is running at about the same levels as it was in the middle years of the last decade ie quite high. Firms haven't hung on to surplus capacity throughout the crisis: in order to survive they had to "liquidate or perish".

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The result? "Supply conditions have tightened appreciably in the last year" at the same time as import prices have risen, pushing up costs across the board. So, while at the height of the crisis clothing and footwear inflation was -10%, today it is 0.7%. Transport inflation was -2%; today it is 5.8%.

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The truth is that almost everything is getting more expensive in sterling terms. Food price inflation is 4.2%, but looking likely to hit more like 10% soon, given the rises in global commodity markets. And household utility bills will surge in the New Year as recently announced price rises kick in. Not much sign of a continuing downward pressure on inflation there, is there?

Still, not everyone thinks inflation is a bad thing. Ex-MPC member David 'Danny' Blanchflower is all for it. In an article in the Guardian this week he suggested that the solution to all our problems would be "five to six years of 5% inflation", created by keeping interest rates very low and chucking a bit more quantitative easing (QE) into the economy. If we had that, he says, we wouldn't need to bother will all this "austerity nonsense". House prices would rise, people would feel more confident and so get spending, and at the same time we would all get to "inflate away" our debt.

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This might sound like a perfectly good idea. But it is actually rather shocking in its cruelty.

Who suffers most from inflation? Anyone with savings (note that 5% inflation would mean that the value of cash would fall by 35% or so over six years); anyone on a fixed income (pensioners and those on benefits); those with no assets and no debt; and the unskilled.

The well off, the professionals and the skilled can demand higher wages to match price rises, and they can enjoy the collapse in the value of their mortgage debt, and the debt held by their companies. If the worst comes to the worst, they can move abroad.

The others? They can't do any of these things. They get to sit and watch as their standard of living collapses around them. Inflation helps the rich and hurts the poor and vulnerable. It is an extraordinary policy to see being recommended in the Guardian.

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