Stop worrying about inflation

It will go away but the danger of deflation remains.

It still looks a little early to me for the majority to swing and it would bring down a torrent of criticism on the Bank's head. But if not this week, then May, when the Bank will have the benefit of first-quarter GDP figures as well as other data, is beginning to look like a racing certainty.

A rate increase in May, when the Bank of England's Monetary Policy Committee produces its next inflation report, is looking like a given, says David Smith* in the above quote from his Sunday Times column (£).

For that to happen, there would have to be a major turnaround in the economy, which does not look likely, to say the least. The problem is that consumer and business confidence has collapsed, net trade is still negative, unemployment is rising, youth unemployment is on course to hit the million mark along with falling house prices and growth was negative in the fourth quarter.

I agree with Smith, though, that there will not be a rate increase this week.

With the economy in its current state, such a move would be a disaster and would likely have to be quickly reversed, perhaps even by the Chancellor with his powers under the Bank of England Act. Far from enhancing the MPC's inflation-fighting credibility, as the MPC members Martin Weale and Andrew Sentance have claimed, there is every possibility that such a move would be a death sentence for the MPC.

Keeping rates down as low as possible and hoping and praying and crossing all of his fingers and his toes that the MPC will do more quantative easing is Osborne's only plan B. A rate increase would mean he -- and probably the coalition -- would be finished. (May, by the way, is Sentance's last meeting and Osborne is unlikely to renew him or replace him with another hawk.)

The Bank of England governor, Mervyn King, has it right. The MPC needs to focus on the inflation that it is able to impact. Contrary to what Sentance has been foolishly claiming for months, inflation today or next week or in six months time is completely irrelevant for this week's MPC decision because it takes interest-rate adjustments about 18 months to feed their way through. The current inflation forecast of the MPC is overly optimistic and may well get revised down this month in light of the bad GDP numbers. Even with that forecast, inflation is well below target. Any rate increase would, in all likelihood, push the economy to deflation. The MPC's new inflation forecast, out next week, will show that inflation will be below target at the forecast horizon.

I have considerable sympathy with Professors Arestis and Sawyer, who argued, in a letter to the Financial Times last week, that the inflation we are experiencing has not been caused by excessive demand and that it would be nonsensical to reduce demand to "solve" it. They wrote: "It has long been recognised that, at best, interest rates by pushing down demand could address demand-push inflation and that they would be helpless in the face of cost-push inflation. At the present time, demand is still low in the UK and clearly significantly below capacity. The pressures on inflation are coming from higher world oil and food prices, value added tax and other tax increases and delayed effects of depreciated exchange rate. It is then clear that raising interest rates has no role to play in bringing down inflation." "No role" may be a bit strong but they make a good point.

I would go one step further and argue that the whole idea of targeting CPI inflation has failed. At the very least, the MPC's mandate should be extended to include growth and employment. The inflation measure should include house prices or could just simply be raised to 4 per cent. As I have said many times, happiness research shows that unemployment hurts people much more than inflation, especially now.

Inflation is going to collapse in 2012 when the impact of the one-off increase in VAT, oil and commodity prices and the exchange-rate depreciation mechanically drop out of the inflation calculations. As Mervyn noted in his recent speech, these three items alone account for 3 per cent of the current 3.7 per cent CPI inflation rate.

Inflation is going to go away because of the big output gap in the economy, simple as that. The danger of deflation, however, remains. Unemployment is rising and unless things improve quickly, any increase in rates would send the economy into a downward spiral as the effects of the VAT increase and spending cuts hit home. In all likelihood, Adam Posen is going to prevail and, by the summer, the MPC will be forced to do more QE. David Smith's racing certainty is likely to fall at the first fence.

*By the way, David, what ever happened to your building skip index? Presumably there aren't many around since the house price crash and the lack of availability of credit.

David Blanchflower is economics editor of the New Statesman and professor of economics at Dartmouth College, New Hampshire

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What's to be done about racial inequality?

David Cameron's words on equal opportunities are to be welcomed - now for some action, says Sunder Katwala.

David Cameron made the strongest, clearest and most high profile statement about ethnic inequalities and the need to tackle discrimination ever yet offered by a British Prime Minister in his leader’s speech to the Conservative Party conference in Manchester.
“Picture this. You’ve graduated with a good degree. You send out your CV far and wide. But you get rejection after rejection. What’s wrong? It’s not the qualifications or the previous experience. It’s just two words at the top: first name, surname. Do you know that in our country today: even if they have exactly the same qualifications, people with white-sounding names are nearly twice as likely to get call backs for jobs than people with ethnic-sounding names? … That, in 21st century Britain, is disgraceful. We can talk all we want about opportunity, but it’s meaningless unless people are really judged equally”, said Cameron.
While the proof of the pudding will be in the eating, this was a powerfully argued Prime Ministerial intervention – and a particularly well-timed one, for three reasons.

Firstly, the Prime Minister was able to root his case in an all-but-universally accepted appeal for equal opportunities. It will always prove more difficult in practice to put political energy and resources behind efforts to remedy discrimination against a minority of the population unless a convincing fairness case is made that values cherished across our whole society are at stake. Cameron’s argument, that any party which tells itself that it is the party of the ‘fair chance’ and ‘the equal shot’ must have a response when there is such clear evidence of discrimination, should prove persuasive to a Conservative Party that has not seen race inequalities as its natural territory. Cameron argued that the same principles should animate responses to discrimination when it comes to race, gender and social class. Put like that, wanting job interviews to be fair – by eradicating conscious and unconscious patterns of bias wherever possible – would strike most Britons as offering as clear a case of the values of fair play as wanting the best baker to win the Great British Bake-Off on television.
Secondly, Cameron’s intervention comes at a potential "tipping point" moment for fair opportunities across ethnic groups. Traditionally, ethnic discrimination has been discussed primarily through the lens of its impact on the most marginalised. Certainly, persistent gaps in the criminal justice system, mental health provision and unemployment rates remain stark for some minority groups. What has been less noticed is the emergence of a much more complex pattern of opportunity and disadvantage – not least as a consequence of significant ethnic minority progress.

Most strikingly of all, in educational outcomes, historic attainment gaps between ethnic minorities and their white British peers have disappeared over the last decade. In the aggregate, ethnic minorities get better GCSE results on average. Ethnic minority Britons are more likely, not less likely, to be university graduates than their fellow citizens. 

As a result of that progress, Cameron’s intervention comes at a moment of significant potential – but significant risk too. Britain’s ethnic minorities are the youngest and fastest-growing sections of British society. If that educational progress translates into economic success, it will make a significant contribution to the "Great British Take-Off" that the Prime Minister envisions. But if that does not happen, with educational convergence combined with current ‘ethnic penalties’ in employment and income persisting, then that potential could well curdle into frustration that the British promise of equal opportunities is not being kept.  Cameron also mirrored his own language in committing himself to both a ‘fight against extremism’ and a ‘fight against discrimination’: while those are distinct challenges and causes, actively pursuing both tracks simultaneously has the potential, at least, depolarise some debates about responses to extremism  - and so to help deepen the broad social coalitions we need for a more cohesive society too.

Thirdly, Cameron’s challenge could mark an important deepening in the political competition between the major parties on race issues. Many have been struck by the increase in political attention on the centre-right to race issues over the last five to ten years. The focus has been on the politics of representation. By increasing the number of non-white Conservative MPs from two to seventeen since 2005, Cameron has sent a powerful signal that Labour’s traditional claim to be ‘the party of ethnic minorities’ would now be contested. Cameron was again able to celebrate in Manchester several ways in which his Cabinet and Parliamentary benches demonstrate many successful journeys of migrant and minority integration in British society. That might perhaps help to ease the fears, about integration being impossible in an era of higher immigration, which the Home Secretary had articulated the previous day.

So symbolism can matter. But facial diversity is not enough. The politics of ethnic minority opportunity needs to be about more than visits to gurdwaras, diversity nights at the party conference fringes and unveiling statues of Mahatma Gandhi in Parliament Square. Jeremy Corbyn’s first speech as Labour leader did include one brief celebratory reference to Britain’s ethnic diversity – “as I travelled the country during the leadership campaign it was wonderful to see the diversity of all the people in our country” – and to Labour bringing in more black, Asian and ethnic minority members - but it did not include any substantial content on discrimination. Tim Farron acknowledged during his leadership campaign that the Liberal Democrats have struggled to get to the starting-line on race and diversity at all. The opposition parties too will no doubt now be challenged to match not just the Prime Minister’s rhetorical commitment to challenging inequalities but also to propose how it could be done in practice.

Non-white Britons expect substance, not just symbolism from all of the parties on race inequalites.  Survation’s large survey of ethnic minority voters for British Future showed the Conservatives winning more ethnic minority support than ever before – but just 29 per cent of non-white respondents were confident that the Conservatives are committed to treating people of every ethnic background equally, while 54 per cent said this of Labour. Respondents were twice as likely to say that the Conservatives needto do more to reach out – and the Prime Minister would seem to be committed to showing that he has got that message.  Moreover, there is evidence that ethnic inclusion could be important in broadening a party’s appeal to other younger, urban and more liberal white voters too – which is why it made sense for this issue to form part of a broader attempt by David Cameron to colonise the broad centre of British politics in his Manchester speech.

But the case for caution is that there has been limited policy attention to ethnic inequalities under the last two governments. Restaurateur Iqbal Wahhab decided to give up his role chairing an ethnic minority taskforce for successive governments, unconvinced there was a political commitment to do much more than convene a talking shop. Lib Dem equalities minister Lynne Featherstone did push the CV discrimination issue – but many Conservatives were sceptical. Cameron’s new commitment may face similar challenges from those whose instinct is to worry that more attention to discrimination or bias in the jobs market will mean more red tape for business.

Labour had a separate race inequalities manifesto in 2015, outside of its main election manifesto, while the Conservative manifesto did not contain significant commitments to racial inequality. The mid-campaign launch in Croydon of a series of race equality pledges showed an increasing awareness of the growing importance of ethnic minority votes - though the fact that they all involved aiming for increases of 20 per cent by 2020 gave them a slightly back-of-the-envelope feel. 

Prime Ministerial commitments have an important agenda-setting function. A generation ago the Stephen Lawrence case opened the eyes of middle England to racist violence and police failures, particularly through the Daily Mail’s persistent challenging of those injustices. A Conservative Prime Minister’s words could similarly make a big difference in the mainstreaming of the issue of inequalities of opportunity. What action should follow words? Between now and next year’s party conference season, that must will now be the test for this Conservative government – and for their political opponents too. 

Sunder Katwala is director of British Future and former general secretary of the Fabian Society.