More than six months have elapsed since the devastating lockdown measures were first inflicted, since when the nation has been shrouded in a fog of confusion and ineptitude. The only certainty is the resulting hole in our public finances and the damage to the economy.
Our two main political parties are equally clueless on what to do, the “Conservative” and “Labour” appellations having become indistinguishable in an unprincipled neo-socialist melange of poorly targeted state handouts. Not one of them has a clue, and a gaping vacuum lies where there should be leadership.
What these politicians fail to recognise is that (i) the unprecedented level of money-printing has not provided a permanent solution to the crisis; (ii) the ensuing wave of price inflation will shred the purchasing power of our money; and (iii) because they believe the lies conveyed by their own statistical models they don’t realise that the currency’s “self-destruct” button has already been pressed.
Since government welfare programmes in most Western countries are linked to “cost-of-living” statistics it is in the state’s interests to blind people to real increases in that figure. The chief instrument of delusion adopted by the Central Statistical Office is, of course, the Consumer Prices Index (CPI) and the contents of its underlying “basket” of goods and services, and the methodology used, are designed to perpetuate the fiction of annual price inflation at the Treasury’s aspirational rate of 2 per cent.
The prices of some 180,000 items are entered in the basket every month, a number that clearly swamps any notion that it reflects your average family’s weekly or monthly shopping spend. The basket also has layers of complexity and arcane algorithms that are susceptible to manipulation and serve no discernible purpose. The contents of the CPI basket are amended periodically, for reasons such as changing consumer preferences or the effect of technology on production methods. But the reason for excluding two of the largest components in any household budget, food and energy, is palpably spurious: they are “too volatile” to contribute to reliable statistics – which rather begs the question of whether the compliers of these indices are more interested in mathematical ease than in changes in purchasing power.
Use of CPI statistics is utterly irrelevant to the circumstances of entire sectors of the community. For example, in recent years the costs of tuition have escalated beyond recognition and have generated mountains of student debt. There was a time when a student could perform chores during the summer holidays, such as mowing lawns, and use the money to pay next term’s fees. Dream on!
And health-care, particularly for
The principal aim of retirement savings programmes is to ensure that the size of the fund “keeps up with inflation”. Yet the common experience of post-retirement beneficiaries is that their so-called “inflation-proof” pension pots leave them poorer in real terms every year.
Where we are - and where we might have been
ECONOMIC PERSPECTIVES 88 – OCTOBER 2020
More than six months have elapsed since the devastating lockdown measures were first inflicted, since when the nation has been shrouded in a fog of confusion and ineptitude. The only certainty is the resulting hole in our public finances and, with it, the massive damage to our economy.
Both main political parties are clueless on what to do, “Conservative” and “Labour” appellations having become indistinguishable in an unprincipled neo-socialist melange of poorly targeted state handouts. Neither has a clue, and a gaping vacuum lies where there should be leadership.
The Labour party, out of power, can do little more than try to hold the government to account. But the Tories? Where is the growth agenda when it is most needed? Why has no “supply-side” strategy been formulated? Desperately needed deregulation hasn’t happened and our innate entrepreneurial zest has been stifled, not unleashed. The PM and his aides have, by default, fallen into the “big state” socialist trap of high taxes and too much spending, heedless of direction or affordability.
The tax quandary
The Chancellor is ferreting about, trying to work out how to raise enough tax revenue to make ends meet. The welter of imponderables has obliged him to cancel the Autumn Budget, and he is said to be dreaming up potential new taxes and contemplating hikes in the rates of existing taxes. This aimless dithering may be understandable - but highly dangerous: there is never a good time to tax wealth-creation.
Damage to the economy has already happened, and raising taxes will make it worse. A tax raid would not bring back the multitude of businesses crippled by lockdown. Furloughs and duff loans have, at great cost, postponed much of the pain, but an escalation in unemployment is now a certainty. It will surge once the record budget deficit of £300 billion compels the Chancellor to switch off the free-money-printer.
This is not the time for retrenchment. By contrast, it’s the time for maximising business opportunities, allowing technology and innovation to flourish in a low-regulation free market, which will be possible only if enterprise is rewarded, not punished. If business taxes are raised, an enterprise exodus will follow, especially now that lockdown has generated innovative ways of doing business online, at the same time showing office space to be an expendable luxury.
Impact on prices – and the currency
What politicians don’t look at, they don’t see. They fail to recognise that (i) the unprecedented level of money-printing has not provided a permanent solution to the crisis; (ii) the ensuing wave of price inflation will shred the purchasing power of our money; and (iii) because they believe the lies conveyed by their own statistical models they don’t see that the currency is already in “self-destruct” mode.
When government welfare programmes are linked to “cost-of-living” statistics it is obviously in the state’s interests to blind people to real hikes in living costs. The chief instrument for perpetrating this fiction is, of course, the Consumer Prices Index (CPI). The contents of its underlying “basket” of goods and services, as well as the methodology used by the Central Statistical Office, are designed to perpetuate the myth that the UK’s annual price inflation matches the Treasury’s aspirational rate of 2 per cent.
The truth is that the mythical “typical” family, whose cost of living the CPI purports to replicate, doesn’t exist. Consumer preferences are always highly individual instances of human, not group, action.
The prices of some 180,000 items are entered in the CPI’s basket every month, a number that swamps any possibility of reflecting your “average” family’s weekly or monthly shopping spend. The basket also has layers of complexity and arcane algorithms that are susceptible to manipulation and serve no discernible purpose.
The contents of the CPI basket are amended periodically, for reasons such as changing consumer preferences or the effect of technology on production methods. But the reason for excluding two of the largest components in any household budget, food and energy, is palpably spurious: they are “too volatile” to give a reliable statistic – which rather begs the question of whether the compilers of these indices are more interested in mathematical ease than in changes in purchasing power. As for the taxes to which everyone is subject, you will find no mention of them in the CPI.
Use of CPI statistics is utterly irrelevant to the circumstances of entire sectors of the community. For example, in recent years tuition fees have escalated beyond recognition and have generated mountains of student debt. There was a time when a student could perform chores during the summer holidays, such as mowing lawns, and use the money to pay next term’s fees. Dream on!
Health-care and medical expenses, are particularly relevant to those close to, or past, retirement age. Like tuition fees, these costs have rocketed to the point that CPI numbers are completely irrelevant. The same phenomenon applies to housing costs, which have mushroomed in step with the credit creation spurt. Neither this, nor the spike in equity prices, is unexpected. Indeed, it is the money-fountain itself that demands an outlet and, of course, that has a direct impact on asset prices
The principal aim of retirement savings programmes is to ensure that the size of the fund “keeps up with inflation”. Yet the common experience of post-retirement beneficiaries is that their so-called “inflation-proof” pension pots leave them poorer in real terms every year.