Express guide to the art of cutting inflation

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The Independent Online
Shortly after winning the 1970 election, Edward Heath announced cuts in indirect taxes and nationalised industry prices, saying that this would reduce inflation "at a stroke". But as many politicians have discovered there is a very big difference betweena one-off reduction in prices and a permanent drop in the rate of inflation.

By the time Mr. Heath left office his policies had pointed to 25 per cent inflation, making his at-a-stroke pledge one of the more spectacular failures in British political history. (Actually, he never quite used those exact words ,but they stuck anyway.)

A more promising way of cutting inflation with the stroke of a pen was proposed last week by Alan Greenspan, the Chairman of the Federal Reserve. He suggested that various statistical defects are responsible for a systematic over- estimate of American inflation by about 1per cent per annum. Note that this is not a one-off - if Mr Greenspan is right, then over a decade the US statisticians get the price level wrong by more than 10 per cent.

The consequences are profound. Much ink has been spilled in recent years over the failure of of growth in real wages for manual workers in the US, but if the price level is being over-stated by this amount, then real wages are being under-recorded by a similar percentage. Furthermore, social security recipients are being heavily over-compensated for the rise in prices. Many billions of dollars could be saved each year if the price level were measured more accurately.

The same would be true in the UK. If (and admittedly it is a very big if) British inflation is also underestimated by Dr. Greenspan's 1per cent per annum, the annual savings on the social security budget from correcting the error would be {M2{M00.7bn in the first year, {M2{M01.4bn in the second, etc. Since the annual saving would rise by {M2{M00.7bn each year, the Government's aim of a 20p basic rate of income tax would soon come into view.