Unemployment, inflation and Wales

While the drop in unemployment is welcome it does not indicate any great growth, says Gareth Hughes

The announcement of today’s modest drop in unemployment is a very small ray of sunshine in what otherwise is a pretty bleak economic scene.

In Wales unemployment has dropped by 9,000 (0.7 per cent) on the quarter to 115,000 (7.9 per cent), which is 10,000 lower than the same period last year. Although worryingly the claimant count has risen by 1,700 in the past month to now stand at 72,400.

These figures may only just be a small respite before the Public expenditure cuts really start to bite. Against such a background Carwyn Jones’s Legislative programme seems worthy but totally inadequate to deal with the economic realities facing most Welsh people.

Many may argue that the Welsh Government haven’t really got the economic powers to deal with the systemic problems of the Welsh economy. True, but there does seem to be a marked reluctance on our First Ministers part to grab the fiscal powers the Westminster government are prepared to devolve to Scotland and Northern Ireland. Let’s hope that he has a change of heart before he gets on his feet to make a statement next week.

Delivery is the key word on the lips of most politicians. Carwyn Jones is even going to establish a delivery unit, whatever that may be.  So let’s hope that he delivers on fiscal powers.

Another who has failed to deliver is Mervyn King or as we must now learn to call him Sir Mervyn.  How would the Bank of England fare if a delivery unit measured their performance? No gold stars here, methinks, for their delivery in dealing with inflation targets in the economy.

According to the Office for National Statistics the latest figures for the UK Consumer Prices Index shows inflation again running at 4.5% or if you take in the Retail Price Index of inflation, which includes mortgage interest payments, it is running at 5.2 per cent.

Now the Bank of England has set the target for inflation at 2 per cent. The latest figures show the rate running at twice this amount. Now this target has been missed not once but 34 times in the last 40 months. If punters put their shirts on horses with the same degree of success, the M&S men’s wear department would be experiencing an unprecedented growth.

What’s the Bank’s response to this? Well, precisely, nothing. Why? I hear you ask, because they can’t risk affecting the recovery. Preventing the economy dipping into recession is the only game in town. So interest rates will be kept at these historic low levels for much longer than is prudent for the economy and the most effective tool in the armoury of countering inflation – raising interest rates – is not to be deployed. The unemployment figures although welcomed do not indicate any great growth. So the Bank will give us more of the same.

Now who will suffer with interest rates being kept at a record low of 0.5 per cent for the 27th month in a row? Well, as Cilla Black would say surprise, surprise it’s the poor. So, nothing new there, then.

According to the Institute of Fiscal Studies, people on low incomes have suffered higher inflation than those on higher incomes in the past decade.  The IFS reckons that pensioners on state benefits had been especially hard hit.

It doesn’t take an Institution to tell us why. For only the relatively better off owner-occupier have benefited from the lower mortgage rates courtesy of the Bank of England’s low interest rate policy.

So the relatively rich are better off but the poor suffer because of the Bank’s inaction on inflation. It was always thus. People on lower incomes who spend a higher proportion of their money on gas, electricity and food have suffered disproportionately because of the sharp rise in these essential items.

The question for the Welsh Government is this, if Sir Mervyn and his Bank of England continue with their current policy how will Carwyn Jones and his team stand up for these very vulnerable Welsh people?

Gareth Hughes is a political commentator and a freelance journalist who publishes his own blog here.

5 thoughts on “Unemployment, inflation and Wales

  1. Will the Labour party benefit from him standing up? If not then it’s not a matter of HOW he will stand up, but rather WILL he stand up!

  2. It is easy to over-estimate the power of the Bank of England. Interest rates affect inflation by affecting the level of demand in the economy. The Bank could have raised rates, depressed demand and induced a second recession to get domestic prices and wages to fall. That would have offset price rises owing to VAT and import price increases. Would falling wages and higher unemployment really have benefited the poor, even if inflation were lower? Higher interest rates now could also push up the pound and reduce imported inflation but by the same token it would make exports dearer and harder. How would that be compatible with rebalancing the economy and encouraging manufacturing? Just as the Bank was given too much credit for controlling inflation 1997-2007 when global conditions made it easy, they are being blamed now for not doing the impossible. Tighter money when the government is slashing spending would be a fast road to depression. True you wouldn’t have to worry about inflation but you wouldn’t be short of other things to worry about – like soaring poverty and social breakdown.

  3. gerald holtham says:
    “It is easy to over-estimate the power of the Bank of England.”
    They are in a situation now of ‘damned if they do and damned if they don’t’. The point is that the BoE should have tamed inflation years ago before house prices got out of control. But no……we had ‘no more boom and bust’ as somebody once said. If they raise rates now, there would probably be another banking crisis? So, we are to inflate our way out of this crisis! Why doesn’t the BoE come clean and say then that it no longer hopes to contain inflation? It’s becoming a joke.

  4. I was thinking about this today……whilst at work. Mr Holtham explains why they are scared to increase rates. So effectively, the pound is loosing it’s purchasing power. The pound, being a currency, has two main functions. Firstly, a medium of exchange. Secondly, a store of value. It is blatantly obvious that it is not performing the second of these functions with the BoE policy of negative interest rates. What should concern the authorities is if the proles start to lose faith in the currency as what happened in Weimar Germany and Zimbabwe and also Argentina and I believe Chile too. That will also bring about social breakdown. I would also like to add that a debased currency hurts the poor more so than the rich. The poor have money whilst the rich have assets which are inflation protected.

  5. David says: “What should concern the authorities is if the proles start to lose faith in the currency as what happened in Weimar Germany and Zimbabwe and also Argentina and I believe Chile too. That will also bring about social breakdown.” – watch it happening in Greece as we speak! The Greek populus doesn’t appear to care a fig about the Euro, even though it has allowed them to lead the high life for a number of years – and that is what is leading to social breakdown.

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