Rising prices bring a new kind of shock

Jun 12 2008 By Nevill Boyd Maunsell

Once upon a time, in the dim, distant past, serious people could be shocked by shocking trade figures.

I believe it was Sir Stafford Cripps who told Britain’s industrialists to “export or die”. Nobody laughed. You didn’t laugh at Cripps. A few sniggered when Harold Macmillan tried the opposite tack, proclaiming “exporting is fun” – also to no great purpose.

It was the other Harold, Wilson, who panicked on being told that Britain was heading for a £800 million trade gap and ordered a devaluation that he and his Chancellor, “Sunny Jim” Callaghan, had repeatedly sworn would never happen on their watch. Callaghan resigned.

It is not like that nowadays. For more than a decade we have watched multi-billion trade deficits pile up month after month and nothing terrible happens.

Foreigners investing in Britain, buying British companies and properties, or just parking spare cash in British banks, provide the flow of funds to pay for those of our imports not matched by our exports. You may argue that cannot go on for ever, but it has gone on for so long that nobody is shocked.

Yesterday’s trade numbers, though, did contain one truly shocking piece of information. Prices of both imports and exports rose by two per cent between March and April. Keep that going for a year and you have trade inflation of nearly 27 per cent.

All right, April may have been a freak month. We have a colossal two-way trade in oil and the price of crude was shooting up. But smoothed out over the three months to April, import prices rose by five per cent – more than 21 per cent a year.

It has become fashionable recently to make comparisons with the crisis of the early 1990s. Each concludes that, however dreadful things are now, we don’t have double-digit inflation. As it happens we didn’t have it then – we had double-digit interest rates imposed in Norman Lamont’s doomed effort to prop up the pound.

Now, unless the trade figures are woefully wrong, we are importing double-digit inflation with a vengeance and we notoriously spend a fearsome amount of our money on imports.

Incidentally, British export prices went up by even more, 5.5 per cent in the three months to April, a technical benefit in that the terms of trade shifted in our favour.

But the message is plain. World trade is in the grip of what could develop into all-round, double-digit super-inflation. And there are few countries more exposed to world trade than Britain.
--------------------
A more cheering aspect of the trade numbers is that British exports have been growing healthily every month so far this year, most notably to the EU, despite gloomy chatter of a continental slowdown sapping demand there.

After years talk about how manufacturing accounts for no more than 17 per cent of the British economy nowadays, industry is doing rather well again, while the banks lick their wounds.

Richard Lambert, director general of the CBI, noted in an interview with the London “Evening Standard” yesterday that Britain is still the sixth largest manufacturing country in the world and that manufacturing is “our best hope for the economy next year”.

A point well made.