Newspaper article The Evening Standard (London, England)

Cue for Gordon to Move the Inflation Goalposts

Newspaper article The Evening Standard (London, England)

Cue for Gordon to Move the Inflation Goalposts

Article excerpt


THE implicit message in yesterday's quarterly Inflation Report from the Bank of England is that we are halfway through the business cycle and we have had the good bit.

For the past few years the growth of consumption has outstripped growth in output and signs of this have been all around us.

Household borrowing has soared, imports of consumer goods have gone the same way, house prices have roared ahead, manufacturing has been under the cosh and there has been a spectacular and sustained surge in retail spending.

This has not been a bad thing on balance, for without the spending drive the economy would probably have slipped into recession, given what has been happening overseas.

But the difficulty is that we cannot go on spending more than we produce and expect the economy to stay on even keel. At some point there has to be an adjustment, or rather a sustained period of adjustment, during which time the sector comes back into balance. If this is not achieved the economy will run faster and faster until consumers can borrow no more and inflation will re-ignite just as consumer spending tails off. It used to be known as stagflation - no growth, but no price stability either.

So we all believe in adjustment to restore the balance - at least in theory.

In practice, however, it is going to be a remarkably difficult trick for the Bank of England to pull off because for balance to be restored consumption will have to run behind output for a considerable time. In other words, while this adjustment is taking place the economy may continue to grow but it isn't going to feel like that.

A further interesting aspect is that the squeeze on the consumer will probably take place in the run-up to the next election, which will probably also be when voters are grappling with higher taxes to fund the National Health Service, transport, education and the like. …

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