Petrol, up. Eating out, up. School fees, up. Hang on, why is inflation so low?
Anatole Kaletsky
HOW MUCH has your cost of living risen in the past year? Most people reading this paper would probably say “an awful lot”. Petrol prices are nearing £1 a litre and are 10 per cent higher than last summer.
Water, electricity and gas are up almost 15 per cent on last year. Council taxes are soaring, private-school fees and hospital charges are totally out of control, while taxis, hotels and restaurants seem to be much more expensive in London than in any other city in the world.
*
Yet inflation, as measured by the official consumer price index, was just 2.3 per cent in the year to July. While this was a marginally higher number than any recorded since 1997 on this particular index, 2.3 per cent hardly amounts to an inflationary crisis and does not seem to reflect what many people feel about their own living costs.
Indeed, on the same day as the 2.3 per cent inflation figure was published, the papers carried headlines not only about oil and petrol prices hitting new records, but also about prices reaching £100 a head in the best London restaurants, about air fares soaring and even about a new record high in art sales at Christie’s, which sold 178 works for more than $1 million in the first half of this year, compared with just 132 in the same period last year.
So what is really going on? Is concern about inflation really as passé as bell-bottom jeans and Sir Cliff Richard? Or do the saloon-bar bores have a point when they gripe about the extortionate cost of petrol or housing or school fees and murmur conspiratorially about government statisticians “cheating” to disguise the stratospheric rise in the cost of living which every fool can see with his own eyes?
The answer to these questions is not just interesting in its own right, but tells us a surprising amount about what is happening today not only in Britain but in the world economy as a whole. The fact is that the statisticians and saloon-bar bores are both right. The reasons for this paradox have nothing to do with statistical conspiracies in Britain, but a lot to do with the state of the global economy and especially China.
To see what I mean, consider the following figures. Over the past ten years the total cost of living in Britain, as measured by the official consumer price index, has risen by just 14 per cent. But that very modest average increase has included inflation in some categories to make consumers wince: school fees, for example, are up 62 per cent, hairdressing up 58 per cent, holidays up 52 per cent and eating out by 33 per cent on average, with top London restaurant prices showing much faster growth. Why then has the total cost of living remained so stable? Because the prices of mass-produced manufactured goods have been plunging: clothes prices down by 42 per cent in a decade, shoes by 31 per cent and consumer electronics by 63 per cent.
At its simplest, therefore, the disagreement over “true” inflation simply reflects people’s tendency to focus on prices that are rising and forget about the ones that are going down. But the extent and persistence of the divergence between service and goods prices in the past decade also suggests a less obvious and more important story in three parts.
The first relates to China’s entry into the global economy. By becoming the workshop of the world, China has pushed down the prices of all mass-produced manufactured goods. The virtually limitless supply of cheap labour and capital in China will ensure that manufactured goods continue to get cheaper, not only in Britain but around the world.
But the relentless downward pressure on manufactured prices from China has resulted in a second effect which is less widely understood, even among economists: cheap imports from China have actually pushed up the prices of many goods and services which the Chinese cannot or do not produce — either because they lack the resources (for example, oil) or the legal infrastructure (financial services) or simply because some things cannot be traded (housing and education).
People who see China purely as a source of downward pressure on prices forget that overall inflation in any economy is essentially determined by the availability of money. If monetary policy is successfully run (as it is in Britain) to produce an overall inflation rate of 2 per cent, while the prices of manufactured goods are persistently falling by 3 or 4 per cent, prices elsewhere in the economy must rise faster to maintain the 2 per cent average inflation rate. In this sense the ever-cheaper consumer goods from China have created more leeway for other prices in the world economy to go up. This effect has been particularly visible in the prices of goods and services that the Chinese are ravenously consuming but cannot produce themselves — for example, oil, financial services and luxury property around the world.
Which brings us to the third, and most surprising, part of the inflation story. As the prices of financial services and luxury goods are driven persistently higher, service-producing countries such as Britain get richer relative to countries that specialise in manufacturing. And within Britain, the rich, who tend to work in high-end service industries that are relatively unaffected by competition from Asia, get richer, while the poor, who tend to work in industries more exposed to cheap-labour competition, get relatively poorer.
For the lucky bankers, lawyers and, yes, even journalists, who are benefiting from this seismic change in the structure of the global economy, there is, however, a sting in the tail. While we are getting richer, the high-end services, most obviously housing, travel and private education — on which many of us spend a disproportionate share of our incomes — are becoming more expensive, because of the very same global trends that are making us relatively rich.
That is why, even as inflation remains almost non-existent, the talk in London’s bars is of galloping prices. Being rich has never been so expensive. And staying rich is going to get more exorbitant by the day. |
