The speed with which Gordon Brown’s “miracle economy” is slowing – Marks and Spencer (MKS) has just joined the growing queue of struggling firms with their worst quarterly sales figures in over two years – prompted the government to resort to some pretty desperate measures during its latest monthly press conference.
Least effective, because it will be largely ignored, was Alistair Darling’s promise to get tougher on energy companies and banks if they fail to pass cost decreases onto consumers.
Then Gordon Brown weighed in with a money-saving proposal to fix and cap public sector pay deals for the next three years, arguing that such a move would help public sector workers to set their household budgets. That’s not a whole lot of help – the offer is likely to match the last public sector wage deal at around 2% per annum whereas at the end of last year the Retail Price Index, the usual barometer for wage settlements, was running at just above 4%. In its favour, a fixed three-year deal would conveniently defer the next pay review headache for the Prime Minister until after his re-election.
Most worrying of all however was Brown’s “virtual admission” as the Times put it that the Monetary Policy Committee plans to deliver an interest rate cut this week – “with expected inflation low, it makes it possible” he said, before quickly backtracking to “made it possible” claiming he was referring to the last decision.
This is at best careless, and at worst outrageous, behaviour. Firstly, commenting on an imminent interest rate decision as an apparently informed “insider” borders on illegal behaviour for anyone other than a government minister, hence the rapid correction. Secondly there are good reasons why the MPC should ignore him and hold fire this month but Gordon Brown knows full well that his comments make that call a lot tougher for Mervyn King.
The reason for resisting a cut is that expected inflation, far from being low, is on the rampage, driven substantially by China, which “will be much less disinflationary going forward than has been the case to date” says DKW’s chief economist, David Owen, in the Times.
Why? First off, there’s the commodity price trap. Oil is now sitting at around $100 a barrel and joins a growing list of industrial staples, including copper (up 22% last year), cotton (up 20%) and steel (up 12%), which are surging in price, with China tipped to be, “the source of relentless demand growth in the years ahead” according to Richard Savage at Mirabaud.
The double inflationary whammy is that by sucking in huge quantities of scarce resources, China is driving up raw commodity prices worldwide and then Chinese manufacturers, hit with these increasing costs themselves are raising export prices to compensate.
Then there’s the weakening pound – many Chinese exports are priced in US dollars and with sterling recently slipping to a four-and-a-half-year low against the US currency, all those cheap imported electrical goods and clothes are suddenly getting a lot more expensive for UK consumers. For example, data from Thomson Financial suggests that the annual inflation rate on household appliances has jumped from -2% to nearer +2% in the space of just a few months.
The uncomfortable truth is that our era of growth and low inflation, courtesy of Beijing rather than Gordon Brown’s reign at the Treasury, is over.