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Rising inflation isn’t anything to panic about

21 March 2017

11:33 AM

21 March 2017

11:33 AM

Predictably enough it didn’t take long for the rearguard Remain lobby, and other opponents of the government, to jump on the latest inflation figures, which show the Consumer Prices Index (CPI) for February rising from 1.8 per cent to 2.3 per cent. Frances O’ Grady of the TUC, for example, said that Britain risked ‘sleepwalking into another living standards crisis’.

A little historical perspective might be in order, especially on the part of the TUC. Inflation of 2.3 per cent would have been a dream back in the late 1970s when its members were pushing the rate beyond 20 per cent through their endless wage demands. Inflation of around two per cent has been regarded for many decades as optimum – encouraging spending yet not eroding savings at too great a rate and guarding against the beast of deflation, where borrowers would find their debts increasing in real terms. That is why the Bank of England was set a target by Gordon Brown of keeping CPI as close to 2 per cent as possible. For much of the past two years CPI has been much below that, dragged down by falling oil prices. Yet now that it is back where it is supposed to be, suddenly people are talking about a cost of living crisis.

By far the biggest contributor to the rise in CPI last month was transport – thanks to recovering oil prices and rising prices of secondhand cars. In the past fortnight crude oil prices have sunk again, so there is little worry that there is going to be a dramatic acceleration from that quarter. As for food prices, around which Remainers have based much of their case for economic gloom, prices measured their first rise in over a year – up by 0.8 per cent in 12 months. But this didn’t have a lot to do with a falling pound – it was more to do with poor weather in Spain’s salad and vegetable-growing regions, which pushed up the price of an iceberg lettuce by 67 per cent. Unless you are Peter Rabbit it is hard to see how food prices represent a cost of living crisis.

The real cost of living crisis in Britain, as for most of the past 20 years, has been in house prices. A separate government index, calculated by the Land Registry, has them rising by 6.5 per cent over the past year – yet another chunky rise on top of years of rampant inflation. There is little prospect of this changing unless someone can find a way of vastly increasing the rate of housebuilding – and the government stops subsidising the housing market through inflationary initiatives such as the HomeBuy scheme.

But there is one small reform coming into effect today which might just help in the longer run: the government is switching its headline rate of inflation from CPI to CPIH – the latter of which incorporates some of the housing costs faced by owner-occupiers. The lack of any element of housing costs in CPI cannot be unrelated to the feeble response of the Blair, Brown and Cameron governments to tackle high house price inflation. They took their eye off the problem because they could look to an inflation index which completely ignored the problem.

As it happens, the switch takes place at a time when CPI and CPIH are both at 2.3 per cent, but for most of the past four years CPIH has been higher. The price of having a more honest inflation index is likely to be in having a higher headline rate of inflation in coming months. But that hopefully might lead us to a situation where governments are forced to tackle the housing crisis rather than bask in the good feeling that rising prices create among those lucky enough already to own a home.


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