George Osborne is, on the face of it, absolutely right. The slide in inflation to a barely discernible 0.5% is, as he triumphantly tweeted, “welcome news” for family budgets. And, at first blush, it might also look like terrific news for him personally too.
After four long years in which he has presided over working Britons getting remorselessly worse off, now – just four months ahead of polling day – pay will at last pull decisively ahead of stalling prices. If that were not enough to put a smile on the chancellor’s face, then the blunting of Ed Miliband’s single most effective line should surely have him beaming. A Labour leader who often struggles to win a hearing could reliably get an audience nodding by complaining of “a cost-of-living crisis”. But won’t this now start to sound like opportunistic grumbling to voters driving past forecourts where, for the first time in years, the price of petrol is no longer expressed in pounds but in pence instead?
Perhaps, but the chancellor’s hoped-for political dividend relies, for one thing, on Britain being prepared to forgive and forget a squeeze that still leaves the average citizen notably worse off than a few years ago. For another thing, it presumes an automatic translation from improving economic experience to more contented political opinion. That’s quite an assumption. Politicians grumble in private that “the voters do not do gratitude” at the best of times, and there are special reasons to hold back from tipping the hat at the coalition just now. A newly stable cost of living does not reflect government action, but – as the Office for National Statistics analysis explained – the great crash gripping global energy markets and now feeding through to cheaper driving and steadier heating bills.
The coalition has talked endlessly about the importance of its long-term plan, but yesterday’s ultra-low inflation was never intended to form any part of the script. Indeed, price rises fell so far below the 2% target which Mr Osborne himself sets that the Bank of England governor, Mark Carney, was yesterday required to pick up a pen and explain to the chancellor why things had slid off course. Not for nothing is the Bank tasked with securing a bit of inflation. Where prices and wages are inching up on average, pay can ebb and flow across different sectors, without anyone actually being forced to swallow an outright salary cut. Where, by contrast, the tendency is for everything to get cheaper, nasty dynamics can set in. Shoppers who can always bank on a better bargain next month will be perpetually reluctant to open their wallets. Meanwhile, the burden of debt weighs increasingly heavily on the whole economy, and particularly on businesses that, as product prices are driven down, find fixed investments translating into dwindling revenue streams.
This is the deflationary quagmire which Japan sank into long ago, and which now looks set to engulf the eurozone. Consumer prices on the continent are rising only a fraction of a percentage point slower than in the UK, but the dangers here are not the same. That’s chiefly because the Bank of England enjoys a free hand with the printing presses, whereas the ECB is at the mercy of political forces which have thus far precluded the launch of a proper quantitative easing programme. Threadneedle Street must stand ready to exploit this freedom to the full. Disinflation will push up interest in real terms, even before rates rise. Fiscal policy, meanwhile, looks set to remain a drag on the economy for as far as the eye can see: MPs spent yesterday debating Mr Osborne’s ludicrous attempt to trap the opposition into pre-committing to a particular path of deficit reduction. A great deal of weight has already been placed on QE, and – in this context – it will have much more work to do.
Price stability may be an accident and is, in a sense, a consequence of weakness. Cheaper petrol would not be sufficient to drive inflation down to nothing were we not in a context of sluggish wages, and the slowest recovery in a century. But, in an economy that retains the tools to prevent things from sliding further into continuous price falls, there is little need to be afraid. The end of inflation may be an upside-down way to get real salaries growing, but anything is preferable to stagnation without end.
