Editor’s blog: Ouch! Fighting inflation hurts

Remember those days back in 1997 when Gordon Brown was hailed as an economic genius (come on, it’s not that long ago)? The principal reason for Brown’s once-heroic status was his grant of independence to the Bank of England and the creation of the Monetary Policy Committee, which removed the Chancellor’s ability to meddle with interest rates for political ends. The theory was that this would lead to economic stability, with the needs of the nation coming before the needs of the government.

The Committee was given one golden rule by which to abide: keep inflation to within a percentage point of 2%, or else. (The 'else' is that they have to write a letter to explain their naughtiness to the Chancellor. There have been harsher punishments for failure handed out to five-year-olds in primary schools.) Now I’m no big fan of inflation. And I’m old enough to remember that rates of 16% in 1974, 24% in 1975 and 16% in 1976 had quite a miserable effect on my 40p-a-week pocket money. Inflation is bad news. But is it really the single Public Enemy Number 1 at the moment? Can’t the MPC be cut a bit of slack?

"It's entirely possible that in trying to cure the illness of inflation, the MPC could end up makingus quite a lot sicker in the short term…"

Because now we face the prospect of a bout of stagflation – stagnation and inflation combined – which makes everyone feel very rotten indeed. It’s entirely possible that in trying to cure the illness of inflation, the MPC could end up making us quite a lot sicker in the short term.

Peter Spencer, chief economist of Ernst & Young ITEM Club, is not alone in demanding that the Government should consider re-writing the Monetary Policy Committee's remit – or leave the UK to face a deep and nasty economic slump. Spencer says there’s diddly squat that the MPC can do to control the more ‘volatile’ elements such as global food and fuel prices, and reckons that the Treasury has assigned it the wrong target. ‘The consumer will have to be crucified in order to meet the inflation target as it stands at the moment,’ he says gloomily, suggesting that the Bank should instead target ‘core inflation’ – which excludes volatile items such as food and energy prices. He said it should aim to keep this measure (currently 1.4%) close to 1.5%.

Former MPC policymaker Willem Buiter (who’s always good for a laugh) told the Telegraph that such a measure ‘would be absolutely idiotic, stupid and counterproductive. Core inflation is only good for people who don't eat, don't drink, use cars or heat or air-condition their houses. Even if they tried to rethink the Bank's mandate they couldn't avoid the fact that the UK economy needs to adjust painfully after a period of excess.’

But the question has to be: can’t anything else be done to remedy the excess without such a dire purgative that we spend the next couple of years doubled up with stomach cramps? Any new wizard wheezes, Gordon? Maybe not. What a sorry fall he’s undergone, following his Faustian pact. Would you rather be Mr Smartypants but Number Two? Or Number One and the derided dunce in the corner? That is the nature of Gordon’s tragedy…