Jeremy Warner: The inflationary parrot is not yet deceased

Wednesday 25 March 2009 01:00

Having been declared dead, it appears that the parrot still lives. I'm talking about inflation, which to the surprise of most forecasters actually rose last month as measured by the Consumer Prices Index. To believe the headlines, you would think we were already in an age of deflation, yet the latest numbers have bizarrely forced the Governor of the Bank of England again to write to the Chancellor explaining why inflation is still so much above target. Wait a while, he might have said, and I'll be writing to you to explain why we are so far below target.

Still, we are not at that point yet. There is obviously a lot more inflation left in the system than everyone thought. The Governor always used to get irritated by the use of the term "stagflation", which described relatively high inflation in combination with sluggish growth. The world looked nothing like that, he would insist. Perhaps a new word should be added to the lexicon to describe the present combination of circumstances – persistent inflation together with outright economic contraction. How about "conflation", the dictionary definition of which is conveniently the coming together of two things?

In any case, the persistence of relatively high inflation has made the Bank of England's already daunting policy challenge that much more difficult. Higher food prices in combination with a depreciating currency, which raises import prices, is making inflation more resilient than it ought to be, given the fast-contracting economy. True enough, inflation as measured by the Retail Prices Index has now sunk to zero, but this is only because of the fall in mortgage and other housing costs brought about by lower interest rates.

So far, the only major beneficiaries of the Bank's efforts to restimulate the economy have been heavily indebted house owners, who have seen their mortgage costs cut dramatically. Savers are being clobbered while the profligate who helped prompt the credit crunch are seeing disposable incomes soar, assuming they are still in a job. The reason Britain is in this mess is that we borrowed too much, spent too freely and allowed our financial system to take on excessive risks. Yet bizarrely, it is those ordinary people and small businesses that have lived their lives responsibly by saving and paying down debt that are being punished the most.

The policy response to the devastation caused by too much debt has been to slash costs and pile more public debt on top of already excessive private debt. I'm not saying this is wrong. Perhaps it is the only thing that can be done. But it hardly feels like justice. The profligate and reckless are being repeatedly saved from the consequences of their own foolishness. Moral hazard on the heroic scale now being created only stores up what are potentially even worse problems for the future.

The intention is to let the economy down gently, rather than have it smashed up in a road crash. The idea is the same as inoculation – to treat the disease with the same poison that caused it. Yet if it only ends up encouraging a return to the bad old ways, then it provides no kind of a long-term cure. The Chancellor may not be able to afford another fiscal stimulus in next month's Budget, but he must find money to ease the pernicious way in which public policy is disadvantaging savers.

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