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Inflation Fall Means Job Cuts

Magazine article Marketing

Inflation Fall Means Job Cuts

Article excerpt

The declared aim of the British government for a number of years had been to reduce inflation to a permanent, sustainable low level. The Chancellor recently reiterated this aim, suggesting that his target is to bring inflation down to the "Japanese level" of around 2%.

Both Nigel Lawson and, until now, Norman Lamont as Chancellor had the longer-term target of zero inflation. Perhaps by settling instead on a figure of 2% Lamont is being more realistic. But the cost of bringing down inflation to the 2% rate will be very substantial.

The core rate of inflation, measured by the GDP deflator, is currently running at around 5% at an annual rate. Although no single measure of inflation is without faults, the GDP deflator covers the prices of all goods and services in the economy, and avoids the short-term distortions of series such as the Retail Price Index.

To bring inflation down to 2% over the next few years, unemployment increases of the order of three-quarters of a million are required on existing levels.

In turn, to bring about this increase in unemployment, the Government will have to run a tight economic policy. Interest rates in real terms will stay high, public expenditure programmes will be cut back, and the overall tax burden will have to rise.

In such a scenario, the prospects for economic growth are hardly exciting. The economy emerging from the depths of the 1990-91 recession, only to move into what can be termed a growth recession - in other words, a period of several years in which markets slowly expand. …

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