That Index SOME THOUGHTS ON STOPPING INFLATION

Press, Volume XCV, Issue 28266, 2 May 1957, Page 10

That Index SOME THOUGHTS ON STOPPING INFLATION

IBy

GEORGE SCHWARTZ

in the “Sunday Times”!

(Reprinted by Arrangement)

However difficult it may be to define inflation, let alone explain it, we all know what it looks like and feels like. A general allround rise in prices speaks for itself when it takes a threepenny bit to do the work of the old penny. This has been an inflationary age, in marked contrast with the nineteenth century, when, after an inflationary start, such relative stability of prices was achieved that the term inflation had passed out of current usage long before 1900, and as late as 1913 had no political or social significance. Let me remind you once again that there was a penny post in 1840 and a penny post in 1913. The busiest people in the country today, who can’t catch up with their work, are the adjusters of slot machines.

We have become so familiar with inflation that we smell it, with a retrospective sniff at its ugly fellow, deflation, at every turn. We look for it and acclaim it not only in the large but in every particular. A rise in one price is not only inflation in itself, but a cause for inflation in others. So we assume and so it happens. All prices, demands and even needs are apparently indissolubly and rigidly linked, so that pressure at any point inflates the whole mass. Fare’s Fare

Thus a rise in the price of potatoes is signalised as inflation; so is a rise in income or purchase tax, higher rents or higher interest rates. If a cold snap bursts the pipes that’s inflationary, and so is a heat wave which excites the popular thirst. Before long someone will prove that the existence of women is inflationary, and on current argument about the impelling forces of inflation a very good case could be made out'for this. “The missus keeps complaining.’* We have got to the stage when measures to stop inflation are inflationary.

Take the present oil situation. The Suez imbroglio has raised the cost of bringing oil supplies to this country. This has raised the cost of all production involv-

ing the use of oil. In some cases this has been passed on. Hence the rise in bus fares, for one example. Other prices have been affected, and one gathers that the unions are ready to pounce. If the cost-of-living index registers any significant increase the wage claims will go in. Well, it’s inflationary, isn’t it? And none of us is going to be the victim of further inflation, if we can help it. So you all think, and a fine muddle you’ve got into on this question.

Let’s look at this oil problem in the large. The country is worse off because of the dislocation in oil supplies, and no juggling with money will alter the facts of this real deterioration. No-one has a claim to be relieved of this loss, and I would make an exception only for physically disabled people, and then at a further cost to the rest of us.

Suppose the governing authorities took this adamant view, and refused to promote any expansion in the national monetary income at this juncture? You could holler as much as you liked about the rise in bus fares being inflationary. but it wouldn’t be. It couldn’t be. Confusion

And it would work this way. The more you as a community of bus travellers spent on fares the less you would have to spend on other things. The bus undertakings would have more revenue to play with, but most of that increase would go overseas. You would have adjusted to the new situation, but no element of inflation would have come into it. Indeed the rise in bus fares is part of the process of adjustment without inflation. If you can get your employer to pay the increase good luck to you, but he will have less to spend in other directions, so that the adjustment has to come somewhere in the economy. Sir Oliver Franks, the chairman of Lloyds Bank, drew attention to this confusion about inflation in his annual speech. Price pegging in circumstances like these does not, he explained, curb inflation. It fosters it. Similarly individual price increases do not have to be automatically compensated by increases in money incomes, since that promotes the inflation it is designed to remedy. Sir Oliver Franks’s comments have relevance for the city which cavils at higher money rates as uncritically as does the populace at higher bus fares. Misapplied Index ,

Something will have to be done about the present uncritical use of the cost-of-living index. It has its purpose as a crude measurement of inflation, as has any other price index, but it is not a proper, let alone an infallible, instrument for regulating the economy. Thus, on this oil situation, if the cost-of-living index goes up by three points because of the rise in bus fares and some other ingredients of the index, 2,000,000 workers will be automatically compensated by wage increases. There is no justification for this. When rents go up as a result of the modification of rent restriction the tenants will have less to spend on other things. This may sound brutal, but would you advocate a compensating increase in wages and salaries? You’re asking for inflation.

We have got ourselves into the silly state when we can’t give ourselves a present because it raises the cost of living and makes us worse off.

Do you want proof of that? Suppose we decided to supply every household annually with new hot-water bottles on the “free” health service, and met the cost by a penny increase in the tobacco tax. Hot-water bottles would drop out of the index, which would merely register the increase in tobacco prices. Immediate howl. Cost of living up! Inflation! Put in a wage claim.