BANK of England governor Mervyn King may be warning of the dangers of destructive inflation but the minutes of the latest Bank meeting show that these concerns are tempered by a fear of slowing down what is now officially known as a choppy recovery.
Destructive inflation, as far as I understand it, is when inflation runs out of control as it did in the 1970s and 1980s.
In the past few days much has been made of the recent rises in food prices, such as bread, blackcurrants and plums.
The Bank itself has been roundly criticised in the City for understating the inflation rate and earlier this week King was forced to write his second letter of explanation to chancellor George Osborne.
It is clear that the current state of affairs is troubling but are we in meltdown as far as inflation is concerned?
I think not. Firstly, although there have been some explosive price rises in the food sector they have not been across the board. So while blackcurrants show an increase of 68 per cent on a year ago, other food price rises have remained less pronounced.
Although I like blackcurrants as much as the next person, they are not an essential food. In other words, they can easily be substituted for other fruits.
Indeed the average annual price rise in the food and drinks sector over the past year has been 0.16 per cent, which is of concern but hardly alarming, especially when one considers that the price of goods and services in other categories such as clothing and recreation and culture are lower than they were a year ago.
In the 1970s, when inflation truly was destructive, there was a massive hike in the price of oil which rapidly fed into the prices of other goods and services and then became the spike for ever increasing pay claims.
Cambridge economist Bob Rowthorn detailed how strong trade unions put in high wage claims and then witnessed companies setting prices higher trying to keep up with the ever increasing cost of fuel (a massively significant component of any inflation index) and he detailed how rising inflationary expectations became embedded.
My feeling is that this is not where we are right now. Indeed the recent BAA dispute with its workers was resolved after the Spanish owned company came up with a pay offer of only two per cent – bang on the Bank of England’s inflation target (although it included a bonus payment too).
With the economy still in a tentative state, it is not clear there is an appetite for long industrial disputes on the grounds of pay (there may be other reasons for disputes, such as dismay at public sector cuts, but that is a different story).
Unions are simply in a much weaker position than they were in the 1970s, partly because of the legislation that was brought in after the 1980s disputes such as the miners’ strikes. The Bank is right to closely monitor inflation in the months ahead but for some Bank members the overriding worry concerns the pace of the recovery.
Nobody’s quite sure what effect the Budget deficit cuts will have but there’s almost daily anecdotal evidence to suggest the mere anticipation of them is already having an impact on spending. Destructive inflation is not the main concern.