Time to take inflation seriously again

Allister Heath
WHO said inflation is no longer a danger? Wherever one looks, prices are rising, demolishing the flimsy case made by the deflationistas. The British Retail Consortium/Nielsen shop price index out this morning confirms that the cost of living is continuing to go up, hitting ordinary folk and fuelling general negativity about the state of the economy. Those of us who have been calling for months now for a gradual normalisation of monetary policy to remind the public that the authorities haven’t given up on the war against inflation are tearing out what little hair we have left. What a shame nobody is listening to Andrew Sentance, the Bank of England’s lone inflation hawk. Of course, shop price figures are merely a small part of the picture; but they do hugely influence people’s perceptions of costs.

Overall shop price inflation increased to 2.2 per cent in October, from 1.9 per cent in September; given how competitive retailers are and how they have been fighting to keep down price increases, this is worrying. Especially problematic is food inflation, which increased to 4.4 per cent in October from 4.0 per cent in September. Even non-food inflation increased to 1.1 per cent from 0.7 per cent in September. While clothing and footwear deflation accelerated to 1.4 per cent, as new-season ranges continued to hit the shelves, three-month average annual deflation was just 1.5 per cent, compared with 5.5 per cent in 2009. For years during the boom, tumbling clothing and white goods prices helped keep down the overall inflation average – this imported disinflation, courtesy of China, helped camouflage the excessive liquidity in the system and conned the authorities into a false sense of security. But it did wonders for living standards, a phenomenon which has now ended.

The large supermarkets, who have done more for consumers than any other part of the UK economy in recent years, are finding it much tougher to continue to discount. This is due to higher input costs from commodities, rising distribution and freight charges, and the rolling effect of January’s return to 17.5 per cent VAT. In particular, cotton prices continue to edge up on the back of weaker ending-stock estimates, pushing Cotlook’s A-index, which measures world cotton prices, to a 15-year high.

There are only a few bits of good news: as global wheat stocks remain 50.2m tonnes above 2007/8 levels, and prices around 40 per cent lower than their peak in 2008, commodity-fuelled food inflation is unlikely to return to past elevated levels. But in virtually every other way, inflationary pressures are now far too high for comfort – and that is even before the massive VAT hike to 20 per cent kicks in early January. It is time for a renewed war against inflation – there is no time to lose.


Congratulations to Mark Field, the Tory MP for the Cities of London and Westminster. His excellent speech, which we highlight on our front page and in which he stands up for London’s financial services industry in defiance of his party’s dogmatic populism, is unusually brave and lucid. He is right that foreigners think we have gone mad as we attempt to destroy – rather than improve and reform – a vital industry for this country. Others in the House of Commons must now defy their parties and stand up for London’s most important industry, taxpayer and employer.