Mervyn King refused to be sidetracked - just as expected

May 15 2008 By Nevill Boyd Maunsell

You read it here yesterday.

Just as I said, the Bank of England's Mervyn King was scathing about suggestions that our politically-pliable Chancellor should relax the Bank's two per cent inflation target and spare us the unpleasantness of squeezing out imported inflation not of our making at the expense of British living standards.

Tinkering with the target, or the nature of the Bank's remit - which is strictly to contain inflation, not try to steer the economy - was "absolutely nothing at all to do with the dilemmas we face", he insisted.

It was one of the few issues where he saw no imponderables, uncertainties, or shades of grey.

Another was the extent to which the real economy, north of the M25 and earning a living unconnected with finance or property, is still not doing all that badly.

The non-financial economy, whatever that is, grew by 0.5 per cent in the first quarter of this year, governor King reckoned, even though oil and gas prices, which nobody can escape, have doubled in the past year.

This, he argued, is what distances our present plight from the Great Depression of the 1930s by a million miles.

Not that this resilience is going to preserve British living standards. Nobody can conjure out of thin air the money to pay for $120 oil - costing four times what it did four years ago - and everything that stems from it. What cannot be earned with higher productivity comes from less to spend on something else, now the banks have stopped lending money to people with little serious chance of paying it back.

Strangely, so far nobody has tried in earnest to defend the buying power of their pay, although the inflationary expectations that the Bank monitors warily are indeed creeping up.

At four per cent now, average earnings are keeping in touch with the retail prices index - the one some people still believe - but only by virtue of bonuses.

The buying power of regular pay has been slipping for months, materially for anyone who doesn't spend much on flat-screen TVs, or the techy gizmos whose prices are still falling.

The much-publicised home-buyers who must re-mortgage their way out of expiring fixed-rate deals are simply taking it on the nose.

Yet even in the public sector the feared "summer of discontent" is not gaining the momentum you might expect when the buying power of take-home pay is falling.

The one serious strike so far, at the Grangemouth refinery, was about pensions, not pay. One theory is that migrant workers from eastern Europe have filled the labour market with willing hands prepared to work for less than their British counterparts if given the chance.

Even if that is only part true, the perception is there and may make British earners less inclined to take chances.

That may be changing. Sunken sterling, down 12 per cent since last July, means an immigrant must earn 12 per cent more to achieve the same result in his home currency.

Wages have been rising in Poland, too, luring back considerable numbers of the legendary Polish plumbers, it is said, at a time when the British building industry is taking a breather.