Inflation: an undemocratic stealth tax

Allister Heath
INFLATION is taxation without legislation, as Milton Friedman, the Nobel prize winning economist, once said. He was spot on. Yesterday’s figures were truly appalling: inflation on the retail price index measure hit 5.6 per cent, the fastest rate for 20 years. On the official consumer price index measure, it reached 5.2 per cent. Over the past 12 months, the British public has suffered a real terms national pay cut because prices are rising at a much faster rate than incomes. Average compensation went up 2.8 per cent in cash terms – but paradoxically fell by 2.8 per cent in real terms as the purchasing power of money slumped, as a result of sterling’s debasement.

The real value of assets and bank accounts is also falling – interest rates are low, and their meagre income taxed (unless sheltered in an ISA), which means that the value of many saving pots is being eroded by 4-5 per cent a year. Average UK house prices are down by 29.9 per cent in real terms from their July 2007 peak, and are back to September 2002 levels after adjusting for inflation, according to the Halifax measure (the decline is sharp but not as pronounced on other indices).

All of this means that the UK is undergoing yet another secret, giant act of redistribution from savers (whose wealth is being eroded as the purchasing power of sterling declines) to borrowers (the value of whose debt is gradually being cut in real terms), from homeowners with no mortgages (whose real terms house prices are falling) to homeowners with mortgages (who are better off from lower real debt but worse off from reduced real house prices), and from workers to those on benefits (whose payments are linked to the CPI). George Osborne is worse off because he has to pay out more in benefits and on index-linked gilts – but he is better off because public sector salaries and all spending fixed in cash terms is being cut in real terms. On balance, this could conceivably even help cut spending by more than the 0.7 per cent planned.

Had the government passed a law in Parliament to take money from one group and give it to another – to grab cash from people’s bank accounts to help pay down their neighbours’ mortgages, overdrafts and credit card bills – there would have been outrage. Had the government decreed a partial default on the national debt (most of which is not indexed to inflation), the markets would have panicked. Yet because this process is happening on the sly, without discussion, and with the Bank of England telling us that this is merely a short-term blip, hardly anybody is batting an eyelid – even though, once again, the prudent are being mugged to bail out the imprudent. Inflation is not just taxation without legislation and undemocratic: it is also the stealthiest of all taxes.

One reason why there has not been more of public outcry is that the balance of power between savers and borrowers has changed. The former have seen their relative numbers and influence diminish; the latter have gained clout after years of bingeing on cheap money. Savers were also given a fillip when RBS and Northern Rock were bailed out; debtors now probably think it is their turn for a handout. But inflation violates contracts and property rights; it creates uncertainty and mistrust. Its costs – economic as well as moral – are far greater than its benefits. Britain needs a renewed commitment to sound money – and a new war on inflation.
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