One of the most potent economic lessons of the last century was the dreadful impact of inflation, most dramatically demonstrated in Weimar Germany in the 1920s. The UK’s last serious encounter with seemingly uncontrollable inflation was back in the 1970s when the rate reached 26.9%. Such high levels of inflation, though holding undoubted attractions for debtors, seriously distort the equilibrium of the economy. Moreover, once ingrained in the system, inflation is very difficult to eradicate.
In recent months, the Bank of England’s anti-inflation stance has been remarkably laid back, especially given the MPC’s remit on controlling general price levels. Tuesday’s CPI figures were not good. Inflation reached 4.4% in July and may exceed 5% shortly, especially since three major ingredients – food, utilities and transport – all have further price increases in the system. Worldwide agricultural prices continue to rise, whilst the ‘big six’ utility companies are pushing through double-figure price increases, primarily due to higher input costs and massive investment requirements. Furthermore, July’s CPI figure, to which many rail fares are linked, will cause the latter to rise by some 8%.
High inflation seriously dissuades saving; it particularly impacts retired people. Although they may not shout too loudly about it, the reality is that, since the financial crisis in 2008 and the subsequent recession brought about ultra-low interest rates, returns to savers have been minimal. Many will argue that raising interest rates now will damage the UK’s already lacklustre growth rate. Perhaps so. The basic lesson, though, is never lose control of public borrowing as happened under the previous Government. Similar comments apply to inflation.
After the huge borrowing splurge of the last decade, it will take many years – perhaps even a decade - to re-create an economy, based on high growth, low borrowing and minimal inflation. Despite the weak economy, rising inflation should not be regarded, as is so often the case, as tomorrow’s problem.