Jeremy Warner's Outlook: No stagflation yet, but there's plenty for the MPC to worry about in latest inflation figures

Bank charges to make you gasp; Blunkett stirs the pensions debate
Click to follow
The Independent Online

Inflation is becoming a worry again, not just in Britain, but in the US too, dashing hopes of any further near-term cuts in interest rates. The main reason is well known - rising oil prices - but even so the scale of the recent surge seems to have taken policymakers on both sides of the Atlantic by surprise.

In the US, consumer prices rose 0.5 per cent last month, while in Britain, the consumer price index was 2.3 per cent higher in July than a year earlier, the highest rate of inflation in eight years and the first time the rate has breached the mid point of the Bank of England's target range since the CPI was adopted as Britain's main measure of inflation in December 2003.

The British rate is still a long way from the 3 per cent that would require the Governor of the Bank of England to write a formal letter to the Chancellor explaining why the Bank has strayed so far from target and spelling out what he proposed to do about it. Yet for an economist of such hawkish inclination as Mervyn King, the level of inflation must already look too close to this trigger point for comfort.

The Governor's comments were made on the back of a particularly bullish forecast for growth next year in last week's Inflation Report. Now it seems that he has a higher inflation rate than anticipated to contend with too. Yesterday's CPI makes it virtually impossible that the Bank's forecast of 2.2 per cent inflation will be met for the first quarter of this year. With more petrol price and bank charge increases still coming through, the August inflation rate is bound to be robust too.

Mr King was almost contemptuously dismissive of a reporter who asked at an Inflation Report press conference earlier this year whether stagflation was a word he would use about the present state of the economy. Anyone who had lived through the 1970s would not recognise stagflation - nil or low growth in combination with high inflation - in the present mix of steady growth and low inflation, he said.

All things are relative and Mr King is of course absolutely right in thinking there very little prospect of a return to the rampant inflation of the 1970s. The structure of the economy and its labour markets are completely different, making the inflationary wage spiral that accompanied the two great oil shocks of that period extraordinary unlikely.

The economy is far less dependent on oil and manufacturing for its livelihood than it was and the power of the unions to force through nationally negotiated, inflation-busting wage settlements has been largely broken. Today the economy is much more sensitive to the demands of international competitiveness, with a plentiful supply of cheap goods from the Far East and cheap labour from Eastern Europe and beyond.

For all these reasons, we don't have to concern ourselves unduly about a return to 1970s style stagflation, even if oil were to reach $100 a barrel. Yet there is still plenty to worry about. Wage pressure in the private sector may remain benign, but in the still recruiting public sector earnings are rising at quite a clip.

The two most worrying features of yesterday's inflation figures were the rise in furniture prices and bank charges. Despite slowing growth, companies are raising prices wherever they can, not lowering them. Protecting profits in response to lower sales with increased prices is a perverse but natural business reaction to lower demand. Those that can will.

The thing that Mr King most dreads - that monetary policy is about to get really interesting again - may be coming to pass. Certainly the present mix of circumstances looks more challenging for policymakers than it has in many a year.

Bank charges to make you gasp

Aaagh! It's that time of year again. You've had the holiday, you've spent the money and now, on viewing your bank statement, you rediscover the exorbitant charges levied by banks for using overseas ATMs. For me, this was in one instance as much as 4.7 per cent of the €250 euros I withdrew.

Most of this will go to my own bank. Can it really be that expensive for banks to offer their customers this now routinely accessed facility? Well no, of course it can't be, but it's yet another reason why banks are so much more profitable than most ordinary companies.

I don't want to engage in another round of bank bashing. On the whole Britain's major banks provide a decent service at a reasonable price, but there is nothing more irritating than the unexpected bank charge, and, as yesterday's inflation figures show, many of these are rising at a rate way in advance of general price inflation.

Never mind the price of oil, a significant proportion of July's rise in inflation was caused by higher penalty charges for unauthorised overdrafts and bouncing cheques. HBOS and Lloyds TSB upped their unauthorised overdraft charges by 20 per cent last month.

Other banks plan to follow suit in October. A whole raft of other charges for so-called "delinquent" behaviour by customers is also being raised by significantly more than the rate of inflation as banks move to protect profits from the effects of the consumer slowdown.

The banks claim that the purpose of these charges is to discourage people from spending more than they can afford. The vast majority of customers who keep their affairs in order by seeking authority for an overdraft facility will never be hit by them. Yet it is remarkable how frequently banks fail to alert their customers to the fact that an overdraft facility needs renewing or that there is a danger of breaching the agreed limit.

The very fact that these charges are included in the inflation calculation suggest that they are more commonly levied than the banks like to admit. According to the consumers' group Which?, UK banks make £3bn a year from charging for unauthorised overdrafts alone.

The banks have largely seen off Treasury inspired pressure for price regulation since Labour came to power, yet they hardly help their case with stealthily applied increases like these. It scarcely needs saying that those least able to afford such charges tend to get hit the worst.

Banks are not in the business of providing a social service. In their defence it should also be said that banks have been central to the democratisation of affordable credit these past 15 years, which has been a social and economic boon. Even so, they push the limits of acceptable charging at their peril. A recent Which? survey found that 35 per cent of respondents were irritated by their banks. Yet only one in twenty of us have switched our accounts in the last two years. Even in these price conscious times, customer inertia is as much the banker's friend as it ever was.

Blunkett stirs the pensions debate

David Blunkett seems determined to upstage whatever it is the Pension Commission, chaired by Adair Turner, has to say about reform of the pensions system. The new Work and Pensions Secretary has all but ruled out the idea of a "citizen's pension", one of the key ideas that the Pensions Commission is considering, and he is apparently planning to outline his own proposals for the future of pensions at the Labour Party conference next month.

Mr Blunkett's determination to grab the bull by the horns is in many respects commendable. Labour was the only major party to go into the last election without a pensions policy, preferring instead to hide behind the as yet unpublished recommendations of the Pensions Commission.

Mr Blunkett wants to reverse this cowardice and produce some policy. Mr Turner hopes to build a political consensus around whatever he recommends, but his favoured solution of a state sponsored, auto-enrolment system to produce a decently sized earnings related pension for all would be doomed to failure without Mr Blunkett's support. Watch this space.

j.warner@independent.co.uk

Comments