Leading Article: It's a dull crusade, but let's fight on for lower inflation

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The Independent Culture
REJOICE! WALMART is charging across the Atlantic Ocean to battle the barons of Rip-Off Britain. Prices in the supermarkets can be confidently expected to fall. Hallelujah! The regulator of the electricity industry has decreed that household electricity bills will fall by an average of pounds 15 a year from next April. Where will it all end? The European Commission and our own new Competition Commission are to force car prices down in the UK. We have got used to consumer electronics such as computers, cameras and CD players falling in price as revolutionary technology rapidly becomes everyday. Clothes shops discount prices in the summer and winter - and spring and autumn - sales more and more heavily each year. A fine silk- and-cashmere pashmina for only pounds 79: here is luxury for the masses.

But the arrival of the people's pashmina does not signal an era of deflation, of continually falling prices, with all the ominous implications handed down in folk memory from the depression of the 1930s. Although many goods and services are falling in price, others are rising. Meals in restaurants, haircuts, insurance payments, cappuccinos, plumbing jobs, petrol, houses, all are becoming more expensive. What this mixed picture signals, rather, is the end of the great post-war inflation, a costly aberration in economic history.

As far back in time as figures go, up until half a century ago, prices varied little. War might have sent them a bit higher, but they fell again afterwards. Recession would cut prices, recovery boost them. But not since March 1960 has the price level in the UK been the same as it was a year earlier. A baby-boomer born in 1945 has experienced a more than twentyfold rise in the price level. Somebody born in 1966, 33 this year, has seen prices rise tenfold. A pound tucked into a bank account for them at birth is worth less than 10 pence now. Those of us who are adults but not yet pensioners are the inflation generation. No wonder signs of any price declines excite us.

The British economy is actually very far from deflation, although others, like Japan and China, are not. The official measure of prices is rising by around 2 per cent a year, close to the Government's target and as close as need be to price stability. As economists between the wars, including the revered John Maynard Keynes, always predicted, stable prices are associated with stable growth and employment.

With such high-profile price cuts reported every day, it is increasingly hard to remember the bad old days of the 1970s, when prices were rising by nearly 30 per cent a year. Groups of workers struck for matching pay deals, leaving the rest of us living by candlelight several times a week. The great majority could not keep up, and purchasing-power dived. Anxious housewives stockpiled sugar, coffee and toilet paper in case they could not afford them in six months' time. Pensioners shivered rather than risk too high an electricity bill.

But even a moderate amount of inflation matters. It creates uncertainty about everybody's future standard of living, except for those too well off to care. It redistributes income arbitrarily, depending on clout in the workplace and sheer luck. It drives people's career choices - will their pension be enough to keep them in old age? Who knows what the cost of living will be in 30 years' time. It makes us obsessive house-buyers - a big mortgage is worthwhile if inflation is going to eat away the real burden of debt. It allows the Government to commit tax fraud on its voters, for tax bands and allowances never fully keep up with prices so the real burden of taxation rises without any Budget announcement. It even tends to be associated with confrontational and unstable politics - contrast high-inflation Italy with low-inflation Germany.

It is hard to crusade for lower inflation without making people snigger. It is the kind of thing chancellors of the Exchequer and central bankers drone about when they are at their dullest. But as Mervyn King, the deputy governor of the Bank of England, noted in a passionate (for an economist) speech about the importance of stability in the value of money, inflation is a sign of a nation that cannot come to terms with its own constraints. For inflation is, in the end, always the result of policies that expand the economy beyond the abilities of its people and machinery to cope. It's always the easy option, living on tick on a national scale.

Perhaps, slowly, we members of the inflation generation are growing more at ease with ourselves. Deflation is a bogus bogyman. Let us welcome Wal- Mart, falling bills and cheap mobile phones. Better still, let's get used to them, and stop thinking there is anything remarkable about the fact that sometimes some prices can go down as well as up.

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