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Inflationary troubles ahead of Osborne’s Budget

22 March 2011

11:05 AM

22 March 2011

11:05 AM

Unwelcome news for George Osborne: he will tomorrow present his Budget against a backdrop of the highest inflation for 20 years. The RPI index — what the nation called “inflation” until Brown changed the definition — is 5.5 per cent. It hasn’t been this bad since the aftermath of the ERM crisis, an unhappy comparison for the Tories. The CPI index is up to 4.4 per. And those who deploy the usual arguments about global food prices are spiking might wonder: why is Britain now even worse off than Greece?
 

 
Even the Zimbabwean media is laughing at us (their inflation is now considerably lower than ours). It’s shocking, but not surprising. As we have long argued here on Coffee House, inflation is out of control in Britain — and Mervyn King doesn’t even seem alarmed about it. In my view, the apparatus used to control monetary policy has proved itself unfit for purpose and I have very little confidence in the situation being resolved by the MPC under its current remit, membership and chairmanship. To have base rates at an emergency 0.5 per cent with economic growth having already returned to 2 per cent trend is obviously inflationary — and fits the template of a debt ridden country trying to deal with the situation by simply letting inflation rip. Allister Heath’s City AM column today lists a few ways that inflation is quite handy for Chancellors. Inflation is not casualty-free: it transfers wealth from savers to borrowers, from the old to the young, from the prudent to the profligate. And the most profligate agency in Britain right now is the government.
 
The Cost of Living has not been an issue for so long that the current generation of politicians has forgotten its deep political impact. Ed Miliband is showing more alarm over the situation than Osborne (who is exposed, because his ill-timed VAT rise contributed to the problem). So this economic malfunction is adding up to a perfect political storm. And this story will hit us, month after month. As the below graph shows (projections courtesy of Citi), high inflation will blight British shoppers and savers for the rest of this year.

The Lib Dem policy of raising the personal allowance will help — by about £17 a month. That’s real help: even at today’s fuel prices, it’s an extra 100 miles in a Mondeo. But Osborne’s solution to the cost of living crisis should be to go far further in this direction.


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