Expert View: So inflation is all our own fault?

Now more than ever it is difficult to distinguish politics from economics. Has the US created three million jobs, or destroyed two million? It rather depends on which survey you pick, and which American political party you are rooting for. For Democrats it is an article of faith that George Bush has "destroyed millions of jobs", while for Republicans the opposite is true. You pays your money...

In the UK, too, it is hard to separate economics and politics. I recall a few stiffly worded emails about political bias when, in one of these columns, I noted that for all the vaunted independence of the Bank of England, it was still aiming at an inflation target set by the Government. It is thus with a plea of political independence that I note the following.

The measure you use for inflation depends both on what you wish to measure and what you want to hear. If, for example, you wish to assess the potential inflationary pressure in the economy resulting from demand exceeding supply, a basket of consumer goods seems appropriate. As such, the impact of taxes and asset prices ought to be excluded. Equally volatile seasonal factors such as food and energy might also be omitted. But if you wish to assess the purchasing power of the pound in your pocket, these things do need to be taken into account.

Currently, a very different story is being told on inflation depending on which approach you take. According to the Harmonised Index of Consumer Prices, UK inflation is running at 1.4 per cent. But if we take a broader measure, the GDP deflator, we see something different: inflation is 3.1 per cent. With UK bonds yielding 4.8 per cent, the measure you choose could, in effect, halve your inflation-adjusted return of 3.4 per cent.

And we all know who's to blame, don't we? We are. We are borrowing too much, spending more than we earn and driving up prices.

Er, not quite. Somebody is, but it's not us. It's the Government. Getting the split between output and prices is difficult at the best of times, but the direction is telling. Digging through the data, we discover that for that 3.1 per cent overall level of inflation or deflator, consumer sector inflation was just 1.5 per cent. In the public sector, it was, wait for it, 8.3 per cent.

Unlike in the US, the UK has increased jobs in recent years and has one of the lowest unemployment rates in the G7. But much of this is down to the public sector. In fact, it's quite feasible to state that all the employment growth in the UK over the past seven years has occurred here. Public administration, health and education accounted for a pretty consistent 6 to 6.5 million jobs for most of the 1980s and 1990s. Since 1997, that has risen steadily and is now approaching 7.2 million. To put this in context, since 1997, unemployment has fallen by 625,000, while public administration employment is up 800,000 over the same period.

Whether or not you believe there is a case to be made for more public spending, the fact is that the Government is doing everything it tells us not to. The budget is in deficit, spending is soaring and prices are going up. At the same time, the cash to fund the public sector spending comes from the same consumer. Remember, government has no money of its own.

And the real problem is, the solution being proposed is to raise interest rates to squash the (non-inflating) private sector further.

And we go along with it, convinced it's our fault. In a way it is. It used to be a concern that governments would "crowd out" private sector investment. Currently it looks like it is crowding out expenditure.

Mark Tinker is a director of Execution Stockbrokers. Mark.Tinker@Executionlimited.com