Ending the nation's affair with inflation
The Bank hates it. Millions don't. The challenge now is to change their minds, writes Anthony Browne
Sunday August 9, 1998
Sit tight, take a deep breath. Here comes a bolt of economic heresy: a little bit of inflation does you good. In the depths of the housing recession in the early Nineties, with prices falling and repossessions rising, the head of the Council of Mortgage Lenders said there was nothing wrong that a dose of inflation would not cure. He was only half joking.
Just don't let the Bank of England hear you say that. It has to ensure that inflation reaches the Government's target of 2.5 per cent, and inflicts enough pain on the economy to achieve it.
In its battle, the Bank is trying to get the public on its side. Members of its Monetary Policy Committee, which sets rates, see it as essential to spread the low inflation gospel and educate the public.
It may be a struggle. Anyone with an economic reputation to defend wouldn't step out of line for fear of ridicule. But historically, the British public has been very tolerant of inflation - unlike the Germans, with their collective nightmare of hyperinflation, who see it as economic enemy number one.
In 1995, the number of Britons who thought that keeping down unemployment was more important than keeping down inflation was twice the number who believed the opposite, said the Social and Community Planning Research group's British Social Attitudes Survey. There has been a similar finding every year since the early Eighties, except one: in 1990, when rocketing inflation was tipping the country into recession, people saw the issues as equal.
The public isn't being entirely irrational. High levels of inflation may curb economic growth, punish those with savings, and force the many pensioners who depend on fixed incomes into poverty. Keynes called inflation the "tax of weak governments". But many other people prosper from a bit of inflation.
The most obvious are homeowners, particularly those with mortgages. If inflation was 20 per cent, a œ100,000 mortgage would be worth only œ80,000 after a year. The lucky borrower would have a mortgage worth, in real terms, œ20,000 less, even without repaying a penny. At the same time, the value of their property would have risen.
The present director-general of the Council of Mortgage Lenders, Mike Coogan, said: "People in steady employment who saw their house prices rise and their mortgages erode, would have benefited from inflation."
David Kern, chief economist of the NatWest Bank, said recently: "The feelgood factor often associated with house price inflation has encouraged a lax, tolerant, and indeed sympathetic attitude towards 'moderate inflation'. The high level of home ownership and the fact that steady real increases in house prices have been a main vehicle for wealth creation for millions has created a strong vested interest across wide groups in society for welcoming relatively high inflation."
It's not only the homeowners. Some businesses, particularly retailers, secretly pray for a little inflation. Pamela Webber, the British Retail Consortium's economist, said: "It makes it easier for shops to put up prices to restore their profit margins without customers noticing. If it is very low, they know exactly what price everything should be."
A modicum of inflation can avoid the nightmare of deflation. Bridget Rosewell, chairman of the economic consultants Business Strategies, and a BRC adviser, said: "A little bit of inflation oils the wheels. If it is very low, the prices of some goods are likely to be falling, which means that if you're holding stock, you're losing money. Too little inflation can make it as difficult to plan as too much inflation."
Britain is a nation of homeowners and shopkeepers, so it's little surprise that few people outside the Bank worry about it.
Some manufacturers are unconcerned, even though inflation is said to make planning difficult for businesses. James Dyson, maker of bagless vacuum cleaners, said: "It isn't inflation that makes it difficult to plan, but a wildly fluctuating exchange rate. High inflation doesn't worry me personally. I can't see much wrong with it."
This tolerance may explain why Britain has - historically - been so inflation-prone. In every decade since the Sixties, the UK has had higher average inflation than the US, France or Germany.
According to Andrew Milligan, economics adviser to CGU Asset Management, a country gets the inflation it deserves: "You can't force a low inflation regime on a country that doesn't want it. Within one or two elections, the government would be voted out. If low inflation is what a country really wants, it can put in the political structures to ensure that low inflation is what it gets."
But attitudes in Britain may be changing. Milligan said: "In the late Eighties we almost had hyperinflation compared with other countries. That and the ERM disaster shocked the Establishment into doing something."
The result is the new low inflation regime of an independent Bank of England and a return to the low inflation last seen before the Seventies oil crisis.
The Bank knows it must persuade a sceptical public that low inflation is desirable - and that it's already here, with high levels a thing of the past. So far, there are few signs of success.
Roger Bootle, author of the book Death of Inflation, said: "There's still quite a lot of inflationary psychology about. People see things going up in price, and say 'ah, inflation', but they don't take account of all the different things that fall in price."
This is reflected in public expectations: surveys show that most people consistently overestimate future inflation. Despite the Government's realistic target of 2.5 per cent, on average they think it will be 4 per cent.
The Bank is trying to "educate" them into changed expectations. But the public's pessimism may not reflect ignorance. With a widespread vested interest in inflation, it could be wishful thinking.
reports.guardian.co.uk |
