BY any standards yesterday's inflation figures were bad for a country which has the highest interest rates in Europe in order to keep prices in check. The headline figure of 4% was the worst for nearly six years and the underlying rate of 3%, significantly above the 2.5% target the Government has set the Bank of England, was the highest since the Labour Government came to power a year ago. In fact the Government has only hit its inflation target twice since it came to power: one of the occasions was the first month, when it could hardly claim any credit for it. The deteriorating situation, revealed by the April figures, has its origins in a succession of own goals by the Chancellor of the Exchequer, Gordon Brown. Were the situation to continue to get worse so that inflation was 1% adrift from the official target the Governor of the Bank of England, Eddie George, would be expected to write
a letter of explanation to the Chancellor. In the current circumstances it should be the Chancellor who should be sending his apologies to the Governor.
There were three main factors in the upsurge in inflation last month. In his Budget last July Brown reduced mortgage tax relief from 15% to 10%, but the measure did not come into effect until April. The delay meant that the consequential increase in monthly mortgage payments coincided with the sharp increase in petrol duty, imposed in the March Budget. We warned at the time that Brown's scheme to inflict an extra duty increase on the motoring public would be inflationary and so it has proved to be. Indeed, had not the oil companies absorbed some of the duty increase themselves the inflationary situation would have been even worse. The third element in the equation was council tax increases well in excess of inflation. These are the responsibility of local authorities, but the Government's niggardly grant settlement was a major cause. The Government's wounds are self-inflicted, but the irony
is that the ball has now been passed back to the Bank's court.
Both the Treasury and the Bank had expected yesterday's jump in inflation. They are betting inflation will come back within its target range in a few months and remain there as the economy slows down and last year's mortgage increases drop out of the equation. To that extent the Bank is unlikely to aggravate the wound by imposing an extra increase in interest rates. The effect would be to push the headline rate even higher in the short run. But a run of disquieting inflation news over the next few months may well delay the first reduction in rates. There are already worries over unsustainable rates of average earnings growth which are not consistent with the official inflation target. The high headline rate will make it more difficult to bring average earnings growth back into line, especially after the pay settlement awarded by Marks & Spencer. The Chancellor is a great one for lecturing
the public about inflation-beating pay rises, but on this occasion he is the real villain of the piece.
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