HC Deb 17 April 1978 vol 948 cc19-21
15. Mr. Nelson

asked the Secretary of State for Prices and Consumer Protection what will be the effect of recent movements in the trade weighted index of sterling on the retail price index in the United Kingdom; and on what exchange rate his present projections for the rate of inflation are based.

Mr. Hattersley

Roughly speaking, each 1 per cent. fall in the exchange rate eventually adds about ¼ per cent. to the retail price index within 12 months. The Government's short-term economic forecasts were published on 11th April. Questions about their construction are for my right hon. Friend the Chancellor of the Exchequer.

Mr. Nelson

I thank the right hon. Gentleman for that informative reply. Is not a further devaluation in the value of sterling bound to have a severe and direct impact on the retail price index? In the past two months sterling has declined by around 5 per cent., but the Government are projecting a rate of inflation for this time next year of, I believe, around 8 per cent. Does not this imply a stable or even rising rate of exchange for sterling?

Mr. Hattersley

No, Sir, I do not think it does. The hon. Gentleman is simply arithmetically right to say that the less sterling buys abroad the greater the likelihood of price increases in the United Kingdom. Certainly during the financial year 1978–79 we shall not have the beneficial effects of the sterling rise that we had towards Christmas 1977.

But I believe that we shall have other factors working on behalf of the control of inflation. One is that commodity prices will not increase as fast as some people have predicted. The other is the attitude of the trade unions. What we have demonstrated this year is that a sensible wage round can in itself keep down prices and improve the standard of living. I believe that the trade unions understand that and that we shall have a good wage round as a result, and I believe that as a result of that we shall keep to our inflation forecasts.

Mr. Skinner

Will my hon. Friend confirm that the trade weighted average has dropped more dramatically since we entered the Common Market than in the period before entry when those calculations were first used? Will he also accept that there are examples of astronomic price rises where the wage element features hardly at all? For example, wages have not played a part in the recent dramatic increase in house prices in the private sector which are now influencing the price index.

Mr. Hattersley

I agree with my hon. Friend that wage increases are not the only cause of inflation, but I think that he would join me in saying that wage restraint over the last three years has been the major cure for inflation, and it is the trade unions' sacrifice and effort which has brought us to this happy position.

I do not agree that there is an adverse connection between the depreciation of sterling and our membership of the Common Market. The package we negotiated in the autumn of 1976, which has put us on the right economic footing, would have been a great deal more difficult to negotiate had we not been in the EEC. In consequence, I regard our membership as economically beneficial.

Mr. Biffen

If, as I hope, the right hon. Gentleman is correct in his forecast that the United Kingdom rate of inflation is likely to fall below the OECD average, is not the likely and hoped for consequence that the exchange rate of sterling might appreciate, with beneficial consequences for the economy?

Mr. Hattersley

Questions about the desirability or likelihood of appreciation or depreciation of the sterling rate should be addressed to my right hon. Friend the Chancellor of the Exchequer. I shall confine myself to the simple arithmetical assertion that a 4 per cent. depreciation has a 1 per cent. effect on the RPI and therefore, in my narrow departmental capacity, I look forward to appreciation, whenever it is reasonable and possible, as a contribution to combating inflation.