The inflation hawks were wrong

As NS economics editor David Blanchflower predicted, inflation has plummeted in the last year.

Last year, as inflation rose to more than 4 per cent (it eventually peaked at 5.2 per cent last September), a band of right-wing commentators and economists demanded that the Bank of England hike interest rates in an attempt to bring prices down. Andrew Sentance, then a member of the Bank's Monetary Policy Committee (MPC), bemoaned "the lack of a substantive policy response to persistent above-target inflation" and warned that "if we do not start to raise UK interest rates gradually soon, we risk having to do so more aggressively in the future". A fearful leader in the Spectator declared: "Inflation is back with a vengeance...Britain is once again in an inflationary cycle...For how much longer can high inflation be described as a blip?"

Others, however, including New Statesman economics editor David Blanchflower, argued that the spike was largely due to temporary factors such as the VAT increase, higher global commodity prices, and the depreciation of sterling, and predicted that inflation would fall back in 2012. In February 2011, in a piece entitled "Stop worrying about inflation", Blanchflower wrote:

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.

Well, the results are in and it looks like Blanchflower was right again (as I've noted before, he was one of the few economists to warn that George Osborne's excessive austerity measures would trigger a double-dip recession). Inflation, as measured by the Consumer Price Index, was just 2.2% last month, the lowest level since November 2009 (see graph below) and only 0.2 per cent above the Bank's target rate.

Inflation is expected to rise over the next few months as this year's round of energy price increases take effect, but it is still likely to remain close to the 2 per cent target rate (which should, in any case, be raised). This should prompt the Bank to keep interest rates at their record low of 0.5 per cent and consider a third round of quantitative easing. As in the US, where Federal Reserve chairman Ben Bernanke has pledged to keep rates near zero until at least mid-2015, sustained monetary stimulus is needed to support growth and employment, not least when the government's fiscal policy remains so determinedly self-defeating. While it appears that the economy returned to growth in the third quarter, the danger of a contraction in the fourth quarter (a triple-dip recession) remains. Had the Bank listened to the inflation hawks and hiked rates, the UK would have suffered an ever deeper double-dip.

It was already clear that the Hayekian right was disastrously wrong about fiscal policy; now it's clear that it was wrong about monetary policy too.

The Bank of England building on Threadneedle Street in London. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty Images
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Autumn Statement 2015: George Osborne abandons his target

How will George Osborne close the deficit after his U-Turns? Answer: he won't, of course. 

“Good governments U-Turn, and U-Turn frequently.” That’s Andrew Adonis’ maxim, and George Osborne borrowed heavily from him today, delivering two big U-Turns, on tax credits and on police funding. There will be no cuts to tax credits or to the police.

The Office for Budget Responsibility estimates that, in total, the government gave away £6.2 billion next year, more than half of which is the reverse to tax credits.

Osborne claims that he will still deliver his planned £12bn reduction in welfare. But, as I’ve written before, without cutting tax credits, it’s difficult to see how you can get £12bn out of the welfare bill. Here’s the OBR’s chart of welfare spending:

The government has already promised to protect child benefit and pension spending – in fact, it actually increased pensioner spending today. So all that’s left is tax credits. If the government is not going to cut them, where’s the £12bn come from?

A bit of clever accounting today got Osborne out of his hole. The Universal Credit, once it comes in in full, will replace tax credits anyway, allowing him to describe his U-Turn as a delay, not a full retreat. But the reality – as the Treasury has admitted privately for some time – is that the Universal Credit will never be wholly implemented. The pilot schemes – one of which, in Hammersmith, I have visited myself – are little more than Potemkin set-ups. Iain Duncan Smith’s Universal Credit will never be rolled out in full. The savings from switching from tax credits to Universal Credit will never materialise.

The £12bn is smaller, too, than it was this time last week. Instead of cutting £12bn from the welfare budget by 2017-8, the government will instead cut £12bn by the end of the parliament – a much smaller task.

That’s not to say that the cuts to departmental spending and welfare will be painless – far from it. Employment Support Allowance – what used to be called incapacity benefit and severe disablement benefit – will be cut down to the level of Jobseekers’ Allowance, while the government will erect further hurdles to claimants. Cuts to departmental spending will mean a further reduction in the numbers of public sector workers.  But it will be some way short of the reductions in welfare spending required to hit Osborne’s deficit reduction timetable.

So, where’s the money coming from? The answer is nowhere. What we'll instead get is five more years of the same: increasing household debt, austerity largely concentrated on the poorest, and yet more borrowing. As the last five years proved, the Conservatives don’t need to close the deficit to be re-elected. In fact, it may be that having the need to “finish the job” as a stick to beat Labour with actually helped the Tories in May. They have neither an economic imperative nor a political one to close the deficit. 

Stephen Bush is editor of the Staggers, the New Statesman’s political blog.