UK Economy: Growth, Inflation and Productivity

Lord Griffiths of Fforestfach Excerpts

Thursday 29th June 2023 Lords Chamber

[Lord Griffiths of Fforestfach (Con)]

My Lords, I thank the noble Lord, Lord Eatwell, for securing this debate. I will focus on one item: inflation. When I saw the breadth of this debate, I suspected that we would discuss different things at different times, which we are.

The noble Lord, Lord Eatwell, made some very good points about the relationship between investment, productivity and growth, but the one word I never heard in his speech was “money”. Perhaps that reflects Cambridge economics. There was no mention of it, and yet, as we just heard, we have a central bank that has a target for inflation and uses the instruments at its disposal to control the stock of money, among other things. Inflation is very important to growth because it invariably creates changes in interest rates, tax rates, spending rates and so on, and because of the turbulence that it provides, which is a disincentive to investment—and that business investment is key to growth.

If we do not tackle inflation, I am afraid that we will live with the current stagflation that we are experiencing of high inflation and very low growth. The Bank of England is responsible for a 2% inflation target and, as we just heard, inflation is between 7% and 8%. The Bank has not had an easy task over the last few years. We have had Covid, Ukraine, and half a million people aged between 50 and 65 leaving the labour force as inactive. In addition, like the Bank of England, other central banks forecast that inflation would be transient, and independent forecasters predicted the same thing. But the one equally great shock that the Bank failed to mention was the increase in the stock of money.

Until 2020, the increase in the stock of money—broad money—had been 2% for a number of years. In 2021 it jumped to over 10% and in 2022 it gradually came down, although it was still very high. The shock we have had from this has been enormous. The same effect was felt in the US, Germany and other countries, as we have seen. There was a monetary expansion on the back of Covid in particular—a tremendous increase in public spending to deal with Covid in 2020-21, which was at the heart of money supply creation.

You do not have to be a monetarist or an ideologue to believe that money matters. One problem we have with the Bank of England at present is that the Monetary Policy Committee seems to feel that it can analyse the problems we have without reference to money.

What should we now do to bring down inflation? It is not something I like saying but, first, interest rates must be raised to a level which reduces overall spending so that inflation will come down. Since December 2021, the Bank has consistently raised rates. However, the Bank rate is only 5%, and the rate of inflation is 7%. That means that real interest rates are minus 2%.

I bring your Lordships’ attention to the following. When Roy Jenkins in the late 1960s had to deal with relatively modest inflation, he raised the interest rate to 8%. When Tony Barber in 1973 raised the interest rate in order to deal with excess money, he raised it to 13%. Healey in 1976 raised it to 15%, Geoffrey Howe in 1979 to 17% and John Major in 1989 to 10%. Therefore, the terrible news is that every other inflation we have had in the post-Second World War years in this country saw interest rates go into double figures, except for under Roy Jenkins.

Secondly, although I sincerely hope that we do not have to go into double figures, 5% is certainly not enough. I think the Governor of the Bank of England said that yesterday in a meeting in Switzerland, and certainly the Bank for International Settlements has said something very similar.

Thirdly, the Chancellor should stick to a 2% price inflation target; fourthly, if the Treasury wants to help borrowers, it should really deal with it through fiscal policy; and fifthly, reflating the economy is at present out of the question. The Government have taken very tough measures, and we should be supporting them in a very difficult economic climate.