After finally ridding the British economy of its endemic postwar inflation, the current UK government seems to be slipping back into its old ways.
The Chancellor of the Exchequer (Finance Minister) recently said, “Pay awards in both the public and private sectors have got to be consistent with our inflation target of two per cent.” His reasoning is that if pay rises were higher, prices would go up and consume the value of higher pay.
A former Conservative Health Minister, who knew a thing or two about economics had this to say on the same subject, “Of course when there is inflation, prices rise, including wages, which are the price of labour. That is what inflation means; the statement is a mere definition. But it is as absurd to say that inflation occurs because prices rise as to say that it rains because the ground gets wet. You cannot have rainfall without the ground becoming wet; the one is inseparable from the other; but we do not mistake the result for the cause.”
His alternative to Labour’s prices and incomes policy approach would be to take money out of circulation by the government spending less or the Bank raising interest rates, or a combination of both.
In Britain, growth is at present around 2pc, and is likely to fall to about 1.3pc in the coming year. Inflation, according to government approved figures is about 3.5 per cent. That gives a total of 4.8pc.
Compare that to a rise in money supply (M4) of 12pc and the cat is out of the bag.
Inflation is caused by having too much money chasing too few goods. And it’s the government that injects that money into circulation, partly by excessive borrowing.
Plus ca change …