Labour have criticised the government after the Office for National Statistics (ONS) announced that inflation rose from 1.3 per cent in December to 1.8 per cent in January.
In a press release responding to the stats, John McDonnell accused the government of “poor economic management” that had “contributed to an unstable economy”.
The shadow chancellor called on the government to “take responsibility for these failings”.
Labour say his criticism was about the pace of the change in prices, which are described in the press release as “rising sharply”.
But what Mr McDonnell didn’t mention is that the Bank of England — which is responsible for managing inflation in the UK — has an explicit target to get inflation to 2.0 per cent a year, and actively wants to avoid it reaching much lower than that.
So this week’s news means inflation has moved closer to the Bank’s target rate — a target that Labour agree is the correct one.
And whether you welcome the increase or not, it’s not clear that the government can take the credit or the blame for it. Much of the rise in inflation has been attributed to petrol prices and air fares, which are themselves dictated by factors outside the UK.
Let’s take a look.
Why does the Bank of England want any inflation?
The rate of inflation tells us how fast prices are rising over time. It can be tempting to assume that inflation going up is always a bad thing.
It’s certainly true that excessive inflation can be damaging — especially if wages don’t rise at the same time.
But very low inflation is bad for the economy too. As the Bank of England explains: “if inflation is too low, or negative, then some people may put off spending because they expect prices to fall.
“Although lower prices sounds like a good thing, if everybody reduced their spending then companies could fail and people might lose their jobs.” The Bank says that deflation — where prices are actually falling over time — can lead to spirals of unemployment and recession.
In 2003, the then-Labour government set the Bank a target of 2.0 per cent inflation a year (as measured by something called the Consumer Prices Index, or CPI). The target has remained the same ever since.
Giovanni Ricco, an assistant professor of economics at Warwick University, explains to FactCheck that many central banks, including the European Central Bank and the US Federal Reserve, have adopted the 2.0 per cent target, which is “generally considered to be […] reasonable” because it allows banks room to adjust their “base rate” when the macroeconomic situation changes.
The base rate influences the interest rates other banks can charge on loans and mortgages, and is the main tool central banks use to manage inflation.
However, there are myriad other factors that affect the rate of inflation — like the value of the pound, the price of raw materials including oil, and even natural disasters — over which the Bank of England has little or no control.
Nevertheless, if inflation dips below 1 per cent or rises above 3 per cent, the Bank’s governor has to write to the chancellor of the exchequer to explain why.
We asked Labour why Mr McDonnell had criticised the government over this week’s news, given it shows a movement towards the same target they endorse.
A spokesperson told us that Mr McDonnell’s criticism of the government was about the pace of the change in inflation (from 1.3 per cent to 1.8 per cent), which the party describes as “rising sharply” — rather than the overall level of inflation or the 2.0 per cent target.
We understand the party has no plans to change the Bank’s 2.0 per cent target for CPI inflation.
The government’s role
Labour’s press release seems to link the government’s “poor economic mismanagement”, which the party says “has contributed to an unstable economy”, to the increase in inflation.
But Joao Madeira, senior lecturer in economics at York University, suggests otherwise: “While it is true that government policy influences inflation, the recent increase in inflation seems to be the result of increases in petrol prices, gas and electricity (and these are mostly influenced by world events such as tensions in the Middle East, rather than UK government policy).”
Giovanni Ricco agrees, telling FactCheck that while there was a “little jump in inflation”, the rise in prices “is more about commodity prices and international factors, rather than national and policy factors”.
Indeed, the ONS says: “The rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago”.
So whether you welcome this week’s news or not, it’s not clear we can lay the blame or the credit at the government’s door.
What about wages?
Whenever we talk about inflation, we also have to consider how much — or how little — people’s wages are rising.
The latest ONS figures show that wages are growing faster than inflation.
Accounting for inflation, average weekly earnings were 1.8 per cent higher in the last three months of 2019 than they had been a year earlier. (That’s according to the ONS’ measure of “regular pay”).
Though it’s worth saying that average real wages have only just returned to the level they were at before the financial crisis — more than a decade after the crash.