Mervyn King recently pointed out that real UK wages in 2011 “are likely to be no higher than they were in 2005… One has to go back to the 1920s to find a time when real wages fell over a period of six years.” This, of course underestimates the drastic fall in living standards, since rising unemployment makes them fall faster still, and the fall has really happened in the last two years.
No-one seriously pretends that rising inflation is the result of wage pressure. It’s the result of rising world energy prices (increasing the cost of living by 4-5%), food and other rising prices on the world market (another 6% excluding the effect of the devaluation of sterling) and the VAT rise (which adds another 1½%). We shouldn’t have imposed the VAT rise but the rest was unavoidable.
So why should we put growth and investment at risk by putting up interest rates? Why are the financial markets and those who comment on them so obsessed with inflation? What needs to happen, what in fact should have happened before Labour lost office, is that the inflation target needs to be increased by 2%, and brought down only as the economy recovers.