Roger Taylor: Labour's inflation lie

Roger Taylor worked for some of the leading banks and investment houses in the City beforefounding his own hedge fund related, investment management business.

Our financial markets are in crisis, posing a threat to future economic prosperity. Although the stock market has yet to crack in any catastrophic way, the Bank of England (BOE) and the City are striving manfully to conceal the full extent of the meltdown in credit markets, the underlying collapse in the economic value of low-grade debt paper and the substantial threat to the balance sheets of even the largest financial institutions.  The alarming images of the ‘run’ against the Northern Rock are a direct manifestation of this crisis.   

Gordon Brown’s main claim to fame is the maintenance, under his stewardship, of relatively low interest rates over an extended period. The key to this has been correspondingly low levels of official inflation.  Based upon the latest National Statistics data, the CPI measure of inflation (the BOE’s benchmark) stood at a meagre 1.9% in July 2007 with the RPI at 3.8%.   

One consequence of the extended period of low interest rates has been an explosion in lending and indebtedness, in part linked to the on-going boom in house prices. As a result, borrowing against property over the period from 2000 to the end of Q1 2007 doubled to just over £1 trillion.  This is one symptom of the increasingly debt-financed economy.  Simply, it is the explosion of increasingly higher risk, non-productive debt, both in terms of supply and demand, that has created the current threat to the economy.

So who, if anybody, is to blame for this? On the one hand, we have the BOE. Given their independence by Gordon Brown, it is they who set the general level of interest rates and have allowed the money supply to expand at a rapid rate thus providing all the liquidity necessary to fuel a debt-led boom.  However, we need to unwind a little to get a more complete picture.  Unlike the Federal Reserve in the US, which takes a view on the broader health of the economy when setting policy, the BOE’s mandate is specific and narrow; to not exceed ‘inflation targets’ set by the Chancellor of the day.  Crucially, then we focus back on the central plank supposedly underpinning the UK’s so-called economic prosperity and low interest rates; inflation.  It is here that the greatest myths, distortion and deception are to be found.

At the end of last year, independent research showed that the true cost of living in the UK was closer to 8% than the (then CPI) 2.4% being claimed by policymakers. Let’s look at some examples of ‘true’ inflation. First, take house prices. This shows a 10.6% year-over-year average increase based upon Halifax data (+12.2% in the first time buyer category).  Energy prices have also soared over the past three years (approximately 60% higher, on average, for gas, 45% higher for electricity). Petrol pump prices are also some 12% higher year-on-year.  As one last example, average council taxes have doubled over the past ten years following a further 4% increase this year (the lowest single year increase for that ten year period). These fundamental price increases are wholly at odds with the notion of a low-inflation economy. Further, many of the examples are unavoidable expenditures for most people, not discretionary, and hence directly impact disposable income.   

When confronted with this enormous discrepancy between the true level of inflation and the ‘official’ highly manipulated figure, the Office for National Statistics simply states that the CPI and RPI are not intended to measure the actual cost of living.  Even by modern government standards, such a statement is disingenuous.  The cost of living is exactly what inflation data should measure.  While it may be useful to view inflation at different points in the economy (i.e. wholesale or retail), the data should clearly reflect reality not mythology.

So, the notion that the UK economic has prospered due to low inflation is a lie. Based upon that lie, the conditions have been created whereby the BOE could maintain artificially low interest rates whilst pumping massive amounts of liquidity into the financial system. The result has been the creation of a massive, debt-fuelled boom with the inflationary impact almost fraudulently masked.   

You may well ask what the government have to gain from this. Quite apart from the obvious deception relating to economic competence, there are far more profound and tangible implications from understating the true level of inflation.  Most directly, it has greatest significance for those government expenditures linked in various ways to (their bogus level of) inflation, such as pensions and other benefits.  Clearly, by suppressing the ‘official’ figure, those outlays are much reduced.  Revenues, of course, are unaffected as they tend to reflect general economic activity.  Therefore, rather like their statistics on crime, healthcare delivery and education, it would appear that the government have adopted a strategy whereby the best way to control inflation is to deny that it exists.  In so doing, they are effectively defrauding those on low incomes or dependent upon inflation-linked social payments (pensions, etc).   

So there, in brief, we have the basis for Labour’s economy ‘miracle’. It is little more than myth and cynical manipulation. Alistair Darling would now have us believe that the UK is merely feeling the draft from some obscure credit-market events in the US and that all is well. The truth is very much closer to home. Does the Tory party have the courage to expose these Labour’s lies?