Inflation: The fraud at the heart of our economy that is destroying the middle class

Wages have not kept up with the 67-fold increase in money supply


There is a fraud at the heart of our economy.

It is fraud that our leaders have chosen to ignore, if not actually perpetrate. It is a fraud that causes the wealth gap to widen. And it is a fraud that is destroying the middle class.

That fraud is inflation.

Inflation once meant 'an increase in the supply of money leading to higher prices'. Deflation meant the opposite – 'a decrease in the supply of money leading to lower prices'.

These meanings have, however, been distorted over time, so that inflation is now 'rising prices' and deflation 'falling prices'. It may not seem important - meanings of words change all the time - but it is.

The official method of measuring inflation is the Consumer Price Index (CPI). The Retail Price Index (RPI) was once used and is often still referred to. Both track the prices of things we commonly use – food, clothing, transport, energy and so on.

From 1989 to now CPI has averaged just 2.8 per cent growth per year. But the amount of money circulating in the UK has grown at an average annual rate of 11.5 per cent over the same period.

Money supply has also grown faster than the economy. In 1971 there were 31 billion pounds in circulation. Now there are just under £2,100 billion (£2.1 trillion). That is a 67-fold increase.

Are we 67 times richer? Some people are. But most of us aren't.

Research by Positive Money shows that only about 10 per cent of newly-created money has gone into the kind of consumer goods tracked by CPI.  So all CPI does is measure the effects of about 10 per cent of money creation.

Positive Money's research shows that 13 per cent of newly-created money has gone into real businesses that create jobs and boost economic growth; 37 per cent into financial markets and 40 per cent into residential and commercial property.

Is it any wonder the financial sector has grown so disproportionately large and powerful, or that the British are so obsessed with houses? That's where the money's gone.

The Bank of England's trusted tool to deal with inflation is to raise interest rates. The effect of higher rates is that money costs more to borrow and people borrow less. So the cost of assets that people use borrowed money to buy - houses especially - tends to fall.

But the last thing government wants is falling house prices. Falling house prices between 1989 and 1994 made the Tories unelectable for half a generation. Never mind the fact that young people cannot afford to buy a home, we'll give them Help-To-Buy instead. Policy-makers will not raise rates unless their hand is forced. So how handy is it to have an official measure that 'proves' that inflation is low? Especially one that ignores 77 per cent of new money-supply.

Even with the suspicious measure that is CPI, for five years between 2008 and 2013 official inflation was 3 per cent. The Bank of England has a mandate to keep inflation at 2 per cent. Yet still it did nothing. Rates remained at the unprecedented low level of 0.5 per cent.

If you owned the assets or if you operated in the sectors that have benefited from all this newly created money - the financial sector and the London property in which it mostly lives - you’ve made spectacular gains. But what if you didn’t?

You got left behind.

And the wealth gap just got bigger.

Wages have not kept up with the 67-fold increase in money supply. They've gone from about £2,000 in 1971 to around £25,000 today. Many families now find themselves having to work longer hours, with both spouses in the workplace, taking on larger debts and having fewer children just to maintain an ordinary middle class lifestyle. Many of their children face unprecedented levels of debt and, in many parts of the country, will never be able to buy a house.

What is happening is an insidious transfer of wealth from those that don’t own the right assets or operate in the right sectors to those that do. This process will not stop until we start measuring inflation accurately and, yes, honestly.

Low interest rates penalise labour and reward capital and assets. That is the simple mantra to remember.

Wouldn't it be nice to have money that buys you more each year instead of less?

The Bank of England is an unelected body that wields tremendous power. For all the talk of its independence, its head is appointed by the Chancellor and is answerable to him.  Serious questions need to be asked about what it gets up to with its and our money.

Dominic Frisby is the author of Life After The State. He is crowd-funding his next book, Bitcoin - The Future Of Money?, with Unbound.

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SThree: Trainee Recruitment Consultant - Dublin

£13676.46 - £16411.61 per annum + OTE: SThree: SThree Trainee Recruitment Cons...

Ashdown Group: Marketing or Business Graduate Opportunity - Norwich - £22,000

£18000 - £22000 per annum + training: Ashdown Group: Business and Marketing Gr...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + Commission: SThree: Are you great at building rela...

Ashdown Group: Database Analyst - Birmingham - £22,000 plus benefits

£20000 - £22000 per annum + excellent benefits: Ashdown Group: Application Sup...

Day In a Page

Read Next
Labour leader Ed Miliband unveils Labour's pledges carved into a stone plinth in Hastings  

Election 2015: Smash the two-party system! Smash the voting system!

Armando Iannucci
Tactical voting is a necessary evil of the current first-past-the-post system, where voters vote against what they do not want rather than in favour of what they do  

Election 2015: Voting tactically has become more fraught in new political order

Michael Ashcroft
General Election 2015: Ed Miliband's unlikely journey from hapless geek to heart-throb

Miliband's unlikely journey from hapless geek to heart-throb

He was meant to be Labour's biggest handicap - but has become almost an asset
General Election 2015: A guide to the smaller parties, from the the National Health Action Party to the Church of the Militant Elvis Party

On the margins

From Militant Elvis to Women's Equality: a guide to the underdogs standing in the election
Amr Darrag: Ex-Muslim Brotherhood minister in exile still believes Egypt's military regime can be replaced with 'moderate' Islamic rule

'This is the battle of young Egypt for the future of our country'

Ex-Muslim Brotherhood minister Amr Darrag still believes the opposition can rid Egypt of its military regime and replace it with 'moderate' Islamic rule, he tells Robert Fisk
Why patients must rely less on doctors: Improving our own health is the 'blockbuster drug of the century'

Why patients must rely less on doctors

Improving our own health is the 'blockbuster drug of the century'
Sarah Lucas is the perfect artist to represent Britain at the Venice Biennale

Flesh in Venice

Sarah Lucas has filled the British pavilion at the Venice Biennale with slinky cats and casts of her female friends' private parts. It makes you proud to be a woman, says Karen Wright
11 best anti-ageing day creams

11 best anti-ageing day creams

Slow down the ageing process with one of these high-performance, hardworking anti-agers
Juventus 2 Real Madrid 1: Five things we learnt, including Iker Casillas is past it and Carlos Tevez remains effective

Juventus vs Real Madrid

Five things we learnt from the Italian's Champions League first leg win over the Spanish giants
Ashes 2015: Test series looks a lost cause for England... whoever takes over as ECB director of cricket

Ashes series looks a lost cause for England...

Whoever takes over as ECB director of cricket, says Stephen Brenkley
Fishing for votes with Nigel Farage: The Ukip leader shows how he can work an audience as he casts his line to the disaffected of Grimsby

Fishing is on Nigel Farage's mind

Ukip leader casts a line to the disaffected
Who is bombing whom in the Middle East? It's amazing they don't all hit each other

Who is bombing whom in the Middle East?

Robert Fisk untangles the countries and factions
China's influence on fashion: At the top of the game both creatively and commercially

China's influence on fashion

At the top of the game both creatively and commercially
Lord O’Donnell: Former cabinet secretary on the election and life away from the levers of power

The man known as GOD has a reputation for getting the job done

Lord O'Donnell's three principles of rule
Rainbow shades: It's all bright on the night

Rainbow shades

It's all bright on the night
'It was first time I had ever tasted chocolate. I kept a piece, and when Amsterdam was liberated, I gave it to the first Allied soldier I saw'

Bread from heaven

Dutch survivors thank RAF for World War II drop that saved millions
Britain will be 'run for the wealthy and powerful' if Tories retain power - Labour

How 'the Axe' helped Labour

UK will be 'run for the wealthy and powerful' if Tories retain power