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

Share

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

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

Account Manager, Spanish, London Bridge

£30,000 + 20K Commssion: Charter Selection: This rapidly expanding organisatio...

Account Manager, Spanish, London Bridge

£30,000 + 20K Commssion: Charter Selection: This rapidly expanding organisatio...

Account Manager, London Bridge

£30,000 + 20K Commssion: Charter Selection: This rapidly expanding organisatio...

Graduate / Trainee Recruitment Consultant - IT

£25000 per annum + OTE £40,000: SThree: Orgtel are seeking Graduate Trainee Re...

Day In a Page

Read Next
'Child Genius': A television show celebrating exceptional intelligence in childhood  

The parents of Channel 4's Child Genius might be bad, but we’re worse for watching

Anna Leszkiewicz
Richard Dawkins  

Richard Dawkins is wrong to suggest that there can be varying degrees of severity involved in rape

Sian Norris
The children were playing in the street with toy guns. The air strikes were tragically real

The air strikes were tragically real

The children were playing in the street with toy guns
Boozy, ignorant, intolerant, but very polite – The British, as others see us

Britain as others see us

Boozy, ignorant, intolerant, but very polite
Countries that don’t survey their tigers risk losing them altogether

Countries that don’t survey their tigers risk losing them

Jonathon Porritt sounds the alarm
How did our legends really begin?

How did our legends really begin?

Applying the theory of evolution to the world's many mythologies
Watch out: Lambrusco is back on the menu

Lambrusco is back on the menu

Naff Seventies corner-shop staple is this year's Aperol Spritz
A new Russian revolution: Cracks start to appear in Putin’s Kremlin power bloc

A new Russian revolution

Cracks start to appear in Putin’s Kremlin power bloc
Eugene de Kock: Apartheid’s sadistic killer that his country cannot forgive

Apartheid’s sadistic killer that his country cannot forgive

The debate rages in South Africa over whether Eugene de Kock should ever be released from jail
Standing my ground: If sitting is bad for your health, what happens when you stay on your feet for a whole month?

Standing my ground

If sitting is bad for your health, what happens when you stay on your feet for a whole month?
Commonwealth Games 2014: Dai Greene prays for chance to rebuild after injury agony

Greene prays for chance to rebuild after injury agony

Welsh hurdler was World, European and Commonwealth champion, but then the injuries crept in
Israel-Gaza conflict: Secret report helps Israelis to hide facts

Patrick Cockburn: Secret report helps Israel to hide facts

The slickness of Israel's spokesmen is rooted in directions set down by pollster Frank Luntz
The man who dared to go on holiday

The man who dared to go on holiday

New York's mayor has taken a vacation - in a nation that has still to enforce paid leave, it caused quite a stir, reports Rupert Cornwell
Best comedians: How the professionals go about their funny business, from Sarah Millican to Marcus Brigstocke

Best comedians: How the professionals go about their funny business

For all those wanting to know how stand-ups keep standing, here are some of the best moments
The Guest List 2014: Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks

The Guest List 2014

Forget the Man Booker longlist, Literary Editor Katy Guest offers her alternative picks
Jokes on Hollywood: 'With comedy film audiences shrinking, it’s time to move on'

Jokes on Hollywood

With comedy film audiences shrinking, it’s time to move on