One subject remains conspicuous in its absence from the political agenda. The government at one extreme continues to bicker about deficit reduction, and the Occupy movement continues at the other to raise demands for a more humane economy, yet the issue of inflation still seems to slip quietly by.
If modern life is sadly governed by money, and inflation determines the value of that money, then it ought to be the concern most central to our politics. Furthermore, whilst our society is based upon expectations that parliament and elections are democratic concerns, by and for the people, there is limited sentiment demanding that currency should be handled likewise.
Inflation, unlikely to drop far below 5% for the foreseeable future, places a disincentive on financial prudence, and an incentive on spending and debt. It means your same £1 coin will only buy 95 pence of wheat, petrol or cotton in a year’s time.
In real life terms, this devaluation of money destroys wages, savings and pensions with disregard of the age, class and apathy of its victims, and as such it ought to represent a social evil dangerous enough to unify otherwise disparate peoples against shared injustice. Perhaps this is why inflation receives such little airtime. It is pernicious, a jack-in-the-box, and if political change is achieved through uncontrollable accidents rather than careful design, inflation stands to change ways of life painfully enough that it should warrant legitimate fear in those on both the political left and right. Many advocates of change still have more to gain from continuity than currency failure.
A fifteen year history of UK inflation contains two crucial moments. In 1997, to applause from free-market acolytes, Gordon Brown, as Chancellor, handed responsibility for interest rate setting to the Bank of England’s Monetary Policy Committee. The decision was a victory for the idea of economy as science, as organisms to be governed objectively by professionals of money, and without fear of amateurish or populist manhandling by politicians. The second moment came, less ceremoniously, in November 2007, whereupon interest rates, traditionally raised to keep inflation low, were dropped from 5.75% to 5.5%. Within two years they were down at the 0.5% where they remain. The rate change came at the end of a period in which the British economy had flirted with deflation, and the complete prohibition of this word in discussing a healthy economy is one more piece of evidence that it is religion rather than science that underpins our fiscal models. Just as we hear only of growth, and never of contraction, to the point at which even contraction is defined in terms of ‘negative growth’, so too do we talk of inflation without entertaining even the possibility of deflation. Both ‘growth’ and ‘inflation’ are treated as givens, as economic normalcies that can exist without need of the opposing conditions that should be necessary to define them.
The November 2007 rate change marked the beginning of a new economy. Over the course of three years prior to that decision, interest rates had climbed slowly upwards, in a fashion befitting a market where signs of bad lending, produced by cheap money, were beginning to show. Increasing rates was the attempt to gain a hold on financial imprudence. Allowing them to plummet, and keeping them low, is recognition of failure in this task. The basic rules of financial discipline no longer apply, and low rates are a hope-for-the-best last resort.
In light of this, the current, 5% rate of inflation is stubbornly unsurprising. Bank governor, Mervyn King’s diagnosis that ‘fingers crossed’ the rate of inflation will eventually lower, should alone be enough to banish forever the myth of economies as rational machines rather than products of negotiation. When the going gets tough, central banks appear to be as constrained as politicians in doing the right thing. That George Osborne can only give his backing to the Bank, and that Mervyn King continues to write quarterly explanations for high inflation, whilst unable to do anything to control it, illustrates that the 1997 separation of politics and interest rates was largely immaterial.
Moreover, government nonchalance in the face of large scale financial disenfranchisement, a 5% cost-of-living tax levied against the population, belies a lack of concern about the precise point at which economy intersects the interests of everyday people. It is telling that the European Central Bank, based in Frankfurt and with a hefty German influence, is the only monetary authority talking candidly about the dangers of inflation. The experience of hyperinflation, responsible for destroying the Weimar Republic in the early 1930s, has left Germany a cultural imprint of the dangers of inflation, in the same way that Japanese attitudes to nuclear weapons are informed by the bombings of World War II.
More interesting than the injustices of inflation, however, is probing the rationale behind these numbers and ideas. A 2% rate of inflation has long been accepted as a healthy rate, paired as it is with the quasi-biblical 2% rate of growth that was until recently the benchmark target of developed states. The theory runs that a 2% rate of inflation is swallowed-up by growth, and even permits it, providing the monetary space into which an economy can expand. Like all the most harmfully persuasive notions, this contains a grain of truth, however, even cursory scrutiny unpicks assumptions too readily posited as science. Most obviously, the election of 2% as optimum is peculiar, for there is no real reason why 1%, 1.6% or 3% might not make similar claims at this position. Secondly, the assumption that 2% inflation will be offset by 2% growth is fanciful because inflation is felt by one and all, whereas growth tends to be consolidated in fewer pockets, and frequently occurs at the expense of the average worker. So it arises that even in better economic times, inflation tends to work against the real wages of the majority.
The worst problem with the myth of healthy, 2% inflation is the idea that an economy will develop regularly, at 2%, as if nothing more complicated than a tree coming to maturity. Although modern economies only allow for the existence of inflation, and never its opposite, in the real world, deflationary forces will always exist. Indeed, the ability to bring prices down is central to doing business, and technological progress is just one near-constant deflationary force. Across the last fifteen years, the rise of Chinese and Indian manufacturing internationally, and the supermarket economy domestically, were two of the most significant deflationary events in recent history. With money supply permitted to inflate at 2%, even as the real world saw changes that should have been bringing prices down, once the downward pull of those one-off trends started to wane, as it has now done, so it is unsurprising that inflation has begun to lift comfortably above 2%. If we allow that cheap imports and supermarkets reduced living costs by 10%, whilst inflation continued unperturbed at 2%, then the actual rate of inflation might be argued to be an enormous 12%. Even if we accept 2% as an appropriate rate of inflation, it is more likely that we would see, say, 1% deflation in one year against 3% inflation in another. The notion of regular 2% inflation, announced at quarterly intervals, is the same blind-sighted quest for easy fictions that has underpinned economics for too long.
And yet where does this leave us? Inflation cannot be curtailed immediately. Interest rates cannot be hiked because an economy is an act of faith and balance, and austerity cannot be foisted suddenly upon markets and employment that were created entirely by a lack of that austerity. It will be a tall order to restore discipline to our economy without bringing it to a standstill, the foundations for these problems have been laid across two decades, and must now to some extent be ridden out.
What will be telling is the openness with which the government ultimately addresses inflation. The current approach, in which the value of our money is devalued behind a mask of business-as-usual, is unpleasantly symptomatic of modern politics. An honest approach, which concedes the necessity of monetary devaluation in exchange for a hope of economic recovery, would represent a healthy discourse, a recognition that the population has a justifiable sense of entitlement to live within a safe, well-managed currency.
If we are to draw positives from the situation, it will have to be the hope that our inflation woes, and the manner in which they are controlled, will expose once again that an economy is something massaged according to people’s interests. If this lesson can be properly adopted, if people can break the spell by which it has been accepted that people should work for economies, rather than economies for people, then positives may yet be drawn from this sorry state of affairs.