The Inflation Monster Is about to Bite

Article excerpt


I am a great admirer of the best economic journalists of the British Press.

For the past 60 years, at least, they have explained what was happening in the British and world economy, and what might be expected next.

They have often differed among themselves, but their collective record stands up very well when compared to that of the politicians or the academic economists.

The journalists have been quick to observe changes of trend and have provided the politicians with many of their best ideas, including Chancellor Gordon Brown's decision to give the Bank of England independence in setting interest rates. They are now warning that inflation may be coming back.

In 1967, I was a young editor of The Times; I persuaded Peter Jay, who was subsequently to become the British Ambassador to the United States, to leave the Treasury and become the economics editor. That was the best decision I ever made as an editor.

Peter Jay brought the new understanding of Milton Friedman's monetarism from the United States to Britain.

Peter had the ear of Jim Callaghan, who was to become the Prime Minister in 1976, because he was then his son-in-law. He convinced Callaghan that the rampant inflation of the mid-Seventies could be controlled only by monetary discipline. The policy was painful, but eventually it worked.

Modern economic policy pays less attention to monetarism and may now be losing control of inflation.

Last week saw four important monetary events. The pound rose above $2 on the expectation of higher UK interest rates.

The British Consumer Price Index for March showed an annual increase of 3.1 per cent.

That triggered the first letter from the Governor of the Bank of England to the Chancellor. Such letters of explanation are required under the Bank's 1997 mandate, which gave it independence, if prices rise by more than one per cent above the inflation target of two per cent. In the same week, the March inflation figures were published in China. They showed a rise of 3.3 per cent.

The Chinese economy is still growing exceptionally fast.

This Chinese figure may be important because the low cost of Chinese exports has kept down the level of inflation in the rest of the world. If China is beginning to experience a rise in inflation, the world's importers have cause to worry. Indeed, the British figures for imports last month showed prices of clothing and toys, both of which come largely from China, are beginning to rise.

The world can no longer leave it to Chinese manufacturers to counterbalance inflation.

There are two economic journalists whom I find particularly valuable for my own reading, in the way that Peter Jay was in the Seventies. One is Anatole Kaletsky of The Times; the other is Martin Wolf of the Financial Times. I certainly hope both of their columns are to be found on Gordon Brown's desk every week. I know they are on Shadow Chancellor George Osborne's.

On Thursday, Mr Kaletsky wrote a warning about the threat of inflation. He is concerned about the widening gap between the Consumer Price Index and the traditional Retail Price Index. The CPI rose by 3.1 per cent in a year; the RPI rose by 4.8 per cent in a year. The RPI is the broader index, which includes elements of the cost of housing through mortgage rates. It is also widely used as a base index for wage negotiation. …