David Prosser: Time to reconsider 20 per cent VAT

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The Independent Online

Outlook Among the many troubling details underlying the headline inflation figures yesterday was the revelation that the cost of clothing rose by 6.4 per cent between August and September, the biggest ever rise recorded during that period. Annual inflation in the clothing sector is now running at 0.9 per cent, the highest level since records began in 1997. The days of ever-cheaper clothes are behind us.

Some of the upwards pressure on clothing prices is being applied by higher labour costs in Asia – which we should welcome – where so much of what is sold on British high streets is manufactured. The rest of the explanation, however, is more prosaic. The weakness of the pound, a 15 per cent increase in the cost of cotton, and higher transport costs have all taken their toll.

The bad news for hard-pressed families (or impoverished fashionistas) is that this return to clothing price inflation isn't going to be temporary. When VAT went back to 17.5 per cent from the temporary 15 per cent rate at the beginning of the year, about half of all retailers chose to take the hit. But in January, when the rate will rise to 20 per cent, it is likely to be a different story. The Bank of England's most recent agents' report reckons 90 per cent of retailers will pass the increase on to customers.

That, estimates Simon Ward, the Henderson economist whose forecasts have so often been eerily accurate, will add 0.6 percentage points to the headline rate of consumer price inflation. And with more hits coming from higher food prices, home-energy bills and fuel costs, Mr Ward warns the long-awaited fall-back of CPI to within a point of the Bank's 2 per centtarget isn't likely anytime soon.

His suggestion is that George Osborne considers postponing the VAT increase. You can see the point: not only will consumers find their budgets squeezed by higher clothes prices, adding weight to double-dip fears, but the persistence of above-target CPI will make it tougher for the Bank of England to countenance a return to its quantitative easing programme.

Now, it is difficult to imagine the Chancellor being prepared to forego the £12.1bn of additional VAT that the Treasury is expecting to raise during the 2011-12 financial year. But the take from the final four months of thecurrent fiscal year will be a more modest £2.85bn according to Treasury figures. Putting 20 per cent VAT back to April would be a sensible and affordable precaution.

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