Retail Prices

HC Deb 28 April 1977 vol 930 cc1470-2

8. Mr. Wrigglesworth

asked the Chancellor of the Exchequer what increase he estimates that there has been in the retail price index as a result of the fall in the value of the pound over the six months to 31st December 1976.

Mr. Robert Sheldon

A rise in retail prices of about 4 per cent. might result from the depreciation of sterling between July and October 1976 and a 7 per cent. rise from the depreciation over the whole period February to October 1976. In each case, the full impact would not come through until six to nine months from the end of the period.

Mr. Wrigglesworth

Does not that answer indicate the wisdom of the 15th December package in the light of subsequent events? Does it not also illustrate the limitations upon any policy of domestic price control?

Mr. Sheldon

I accept what my hon. Friend says about the wisdom of the December package—that will come as no surprise to him. Since October the improvement of the pound has resulted in a rise in the RPI by about 2 per cent. to 3 per cent. below what it would otherwise have been. I think that my hon. Friend can draw his own conclusions about the implications of this on prices.

Mr. Ridley

What does the hon. Gentleman think was the cause of the fall in the value of the pound, and to whom should the blame be attributed?

Mr. Sheldon

Part of the blame goes back to 1973, as the hon. Gentleman has accepted, from time to time. The main cause has been the excessive inflation in comparison with other countries, coupled with the excessive use of the printing press, causes from which we are only just recovering.

Mr. Gould

Is it not the case that the depreciation of the pound accounted for about one quarter of our inflation rate in 1976? Is not a much more important factor in our economic prospects the need to produce and sell more? Does my hon. Friend agree that this cannot happen as long as our export prices for manufactures are less competitive than at any time since 1972?

Mr. Sheldon

As I said in reply to a previous Question, I accept that competitiveness is also of great importance. There is a balance to be struck. I accept what my hon. Friend says about the relationship between the decline in the pound and the increase in prices. In fact, the retail price index varies by between one-quarter and one-third of 1 per cent. for every 1 per cent. depreciation, and it takes six to nine months to work its way through.

Mr. David Howell

Would the Financial Secretary accept a lesson from a former deputy leader of the Labour Party, who said there are no more alibis now? If, as he tells us, the cause of the fall in the pound last year was the high differential inflation rate in this country and if, in 1977, we are once again running at an inflation rate roughly twice that of the OECD countries, what future impact does he think that situation will have on the pound?

Mr. Sheldon

The hon. Gentleman should turn to his monetarist friends for an answer to that question. Their answer is that the winding down of inflation is a very hard and long struggle. That is what has been taking place. If adverse factors appear at any time, it is easier for inflation to increase once again than to maintain its downward descent. That is the lesson that we have learnt over the past few years and the lesson that all future Governments will have to heed.