Stop dithering Chancellor, it's time to put the squeeze on

May 14 2008 By Nevill Boyd Maunsell, Economics Editor

NBM:The time has come for Alistair Darling to stop dithering like his leader and act like the wimp Britain needs.

Peter Spencer, the Ernst & Young ITEM Club’s respected economist, didn’t put it quite that way yesterday, but there is no mistaking his meaning.

It is no good shooting for a two per cent inflation target by fiddling with interest rates when the price of oil is multiplying every 18 months, feeding through to gas prices that are set to give us two double-digit utility bill increases in six months.

It is the Chinese appetite for commodities from wheat to platinum that is inflating the cost of everything except, so far, human work.

The Bank cannot squeeze the Chinese with British interest rates, or conjure billions of barrels, which may not be there, out of the Saudi desert.

It can check inflation only by making money more expensive for British companies and British individuals to borrow – by squeezing British profits and the British standard of living.

Anyway the mechanism has now ceased to work as advertised.

The Bank has cut interest rates three times, but real-life interest rates have almost all gone up, not down.

They are governed by the dreaded, credit-crunched LIBOR, which has lost contact with the Bank’s base rate.

The Bank pulls its once-powerful lever and nothing happens.

Professor Spencer propounds the heresy that this system was never the brilliant success it is cracked up to be, almost a matter of chance.

While the Chinese were conquering the industrial world with ever-lower prices, the Bank kept interest rates low to stop inflation from sinking below its target.

Result: the house price bubble and the present unpleasantness.

So, he asks, why pile on the agony now?

A real, paid-up wimp of a Chancellor would tell the Bank, forget that target, for a couple of years anyway. Face the trade-off between growth and inflation and go for growth, go for jobs – and, who knows, you might even salvage the election for us.

Mervyn King is unlikely to have much truck with that when he presents the Bank’s ‘Inflation Report’ this morning.

He believes in his job and can claim that his remit from the Government – which Chancellor Darling renewed just a couple of weeks ago – does in fact give the Bank wriggle room to bend with events beyond its control without plunging us into a recession.

He can also point out that he has been warning for months that he is likely to be writing to Mr Darling this year to explain why inflation has topped three per cent – possibly more than once.

The rest of us have got to relearn the art of living with inflation.

The best trick is not to be scared by headlines in the Daily Mail and, better still, be young.

Research from Alliance Trust calculates that real inflation for the under-30s really is still three per cent.

They spend a high proportion of their money on audio gadgets whose prices are still falling.

That rises to 4.1 per cent for the over-75s who spend most of what they have on food and keeping warm.

But at least they are not first-time buyers.