We have been warned. If we are not careful, inflation could fall further plunging us – horror of horrors! – into a period when the value of the pound in our pocket (or purse) stays stable, in other words no inflation. What is so worrying about that? A lot of allegedly informed opinion mumbles that it would be like the 1930s. All sort of things happened in the 1930s, some bad but also some good. We began to climb out of the slump. There was nothing in that period which suggested that inflation was desirable, Indeed it was much feared. The idea people need a spot of inflation to keep them spending is quite absurd given that the public always builds in its own expectations about rising prices and is usually correct.
Why have any inflation at all? If 2pc is good –which is the Bank of England’s lower target - why not 1pc, or even nil? For those who do not want to tackle their calculators to do the sums for them, there is always the ‘rule of 72’. You divide the rate of inflation into 72 and that will tell you how long it takes for the value of money to halve. So at 1pc your pound is set to lose half of its purchasing power over 72 years. It neatly coincides with the average lifetime. But if the rate is 2pc that means a halving of the purchasing power over a much shorter period: 36 years. In other words you lose three quarters of the purchasing power over a lifetime and that is repeated again and again – every 36 years. This is nothing to be complacent about. For most people this means a decline which reaches into their retirement, when grumbles about rising prices and declining real income become commonplace.
According to the rules, the rate of inflation is now so low that Governor Mark Carney will have to write a letter to the Chancellor of the Exchequer apologising for his ‘failure’. The falling price of oil is not my fault, he will no doubt reply.
Albert Einstein is supposed to have said that compound interest was the eighth wonder of the world.
Certainly many people do not understand it or the baleful effect it has on their savings. The Government is now set to introduce its new ‘market – leading‘ bonds which will allow pensioners to up to £10,000 a year into a bond which will pay 2.8pc for a one year or 4 pc on a three year account.
Whether this is worthwhile is not the point, surely. What matters is that, given it is only for pensioners, this rate of interest is being rationed. This does not inspire any hope that the Government has it in mind to see inflation falling.
Yet we did have one period when inflation was so low as to be almost unnoticed. That was in the last three years of the 1950s. This was no doubt due to the austere efforts of then-Chancellor Peter Thorneycroft who resigned in 1958 alongside his two Treasury colleagues Nigel Birch and Enoch Powell.
Their argument was along the classical lines that inflation was caused by government overspending.
They curbed that tendency when they presided over the Treasury. When Harold Macmillan stood firm against them on the last, small sum they proposed to save, the trio resigned in 1958. They feared the brakes were coming off, as indeed they were. It was a turning point in Britain’s postwar government.
Thereafter the spenders got the reins.
Once we apologised for inflation. Now politicians and economists fuss that it may be too low. But cheer up! With the Chancellor constantly re-writing his Budget targets serious inflation will soon return.
Andrew Alexander is a British columnist and journalist.