Sticks and Stones

Ten years of stable economic growth is often spoken about when admirers (himself included) assess Gordon Brown’s economic legacy as Chancellor. The previous ten years of growth have happened and are undeniable, but will the UK economy grow in 2008 and 2009?

Alarmists were (unsurprisingly) alarmed yesterday at the publication of the Bank of England’s first Inflation Report for 2008, when Governor Mervyn King warned that inflation was rising due to higher costs, demand was dampening and a technical recession (two consecutive quarters of negative economic growth) was not that far away from the Bank’s projections.

January’s inflation figures, released on Tuesday by the Office of National Statistics, showed the highest annual increase in CPI (the consumer price index) for seven months, and a change in methodology may push the 2.2% inflation rate higher once increased energy costs are accounted for immediately. RPI (the retail price index), which is broadly believed to be a more accurate representation of UK inflation levels (and hence benefits, pensions, student loans and a lot of pay deals are linked to it), was up to 4.1%.

With inflation on its way up, and with the Monetary Policy Committee mandated only to target inflation, the hopes by businesses of a US Federal Reserve type slash of interest rates are likely to be dashed. Even a moderate cut looks unlikely, with Mervyn King prepared to write his second letter of explanation as to why inflation is not on target in 2008. The government are hardly helping the situation by prudently applying fiscal policy either. Fuel duty was raised towards the end of 2007, and is set to rise by 2p a litre in April 2008, at a time when the real price of petrol has never been higher.

So with a government determined to tax somewhat irresponsibly, a Bank of England worried about inflation and consumers unwilling to spend, the prospects for growth in 2008 are bleak.