Woah. We\’re used to Mervyn King\’s monthly letter to explain the latest inflationary overshoot by now — but this, this is still quite something. CPI inflation rose to 5.2 per cent in September, a 0.7 percentage point increase on the month before and equal to the previous record level set in September 2008. RPI inflation, meanwhile, stood at 5.6 per cent, its highest since June 1991. And so the cost of living is shooting up, while growth and wages stall. It\’s a particularly poisonous brew.
It\’s also one way of setting the country up for future growth.
Imagine, just imagine, that your analysis of what ails the UK economy is low productivity. Low productivity of labour that is.
There are certainly those who do say that this is the problem: half the TUC for example. They then say that what is needed is more education, more training and more investment to raise the productivity of labour.
But there\’s another way to achieve the same trick.
For productivity of labour is the relationship between the cost of labour and the value of what that labour produces. So, if through inflation one increases the value of production (in nominal terms, of course, for we\’re talking about inflation, not relative price changes across goods) and at the same time reduces the cost of the labour (in real terms, as wage rises fall behind general inflation) one is increasing labour productivity.
Which is just great, in end result if not in the experiencing of it. For lower labour costs/higher labour productivity mean that the goods and services made here are cheaper in the export market.
Think this is really appalling? Well, it\’s pretty much what the Germans did from the late 90s to the crash. They didn\’t use inflation to do it, true, but they did deliberately hold wages down in order to boost labour productivity and thus potential export success.
Worked pretty well too, eh?