Inflation (Hansard, 6 November 1986)

§ 8. Mr. Andrew MacKay
asked the Chancellor of the Exchequer if he will make a statement on the current level of inflation.

§ Mr. Lawson
The retail prices index increased by 3 per cent. in the 12 months to September.

§ Mr. MacKay
Does my right hon. Friend agree that the impressively low level of inflation enjoyed in this country today could be put in jeopardy if we continue to have high wage increases which bear no relation to productivity?

§ Mr. Lawson
We do have a problem with wage increases running far in excess of productivity. That is perfectly true. I believe that this is basically a threat to jobs and that is why I am concerned about it. It is not a threat to inflation which can be kept under control by our monetary policy.

§ Mr. Penhaligon
Does the Chancellor agree that the current level of inflation cannot sustain the personal credit explosion which is currently taking place at a level of 140 per cent. over the past 12 months? Does that mean that the Chancellor is to allow inflation to increase? Will he take measures to control credit? Or is he just hoping that it will all hang together for another 12 months?

§ Mr. Lawson
I am perfectly happy to rest on this Government's record on inflation. We have brought inflation down from the peak of 27 per cent. that occurred when the Labour Government were in power, supported by the Liberal party, to the present level of 3 per cent., which is one of the lowest levels it has been for the past 20 years. The policies that brought inflation down will continue to remain in place and ensure that it remains low.

§ Mr. Dickens
Is my right hon. Friend aware that, because of the firm grip that the Government have kept on inflation, the risk-takers, entrepreneurs and job creators who went abroad are returning to Britain? Those people were driven abroad by the high taxation and high inflation of a Socialist Government. I hope that the voters of Knowsley, North remember that.

§ Mr. Lawson
As usual, my hon. Friend is absolutely right. I would add that a further important change has 1075 arisen as a result of the new tax climate and the sharp reduction in inflation. We now have more new business formation than ever before. Every week 500 new businesses net are set up. That is one of the most important seeds for the future which can give us encouragement and which we have sought for a long time.

§ Mr. Duffy
Is the Chancellor aware that his known assessment of the underlying rate of inflation is based on an underestimate of sterling depreciation which, under the law of one price, affects not only imports but works through to all goods and pay, and eventually even to the non-trade sector?

§ Mr. Lawson
The answer that I gave concerned the retail prices index for September as calculated by rules which have been accepted by parties on both sides of the House. Despite its defects—and it may have some—it is the best and generally acknowledged measure of inflation that we have. If the hon. Gentleman is thinking of future inflation, I shall have something to say about that later today.

§ Mr. Dorrell
Does my right hon. Friend agree that the speech that was recently delivered in Loughborough by the Governor of the Bank of England on the role of monetary policy and the control of inflation strengthens the argument for Britain joining the exchange rate mechanism of the European monetary system? As we downgrade the importance of monetary aggregates in the control of inflation, are we not by implication increasing the importance of stabilising the external value of the pound?

§ Mr. Lawson
I am sure that my hon. Friend was especially pleased that the Governor of the Bank of England gave his important lecture on monetary policy in his constituency. It is a lecture that will repay reading by the whole House. As for my hon. Friend's question about the exchange rate, of course it is important, and it would be highly undesirable to see a continuing depreciation of the exchange rate, which would inevitably cause faster inflation. That I am determined to avoid.

§ Mr. Heffer
The people of Knowsley, North now have to pay more for their bus fares as a result of the deregulation of the buses. Is that an increase in inflation, or not?

§ Mr. Lawson
The rate of inflation of 3 per cent. is less than half the lowest figure that it ever reached in any month under the Government whom the hon. Member supported.

§ Mr. Latham
Will my right hon. Friend repeat what he said in his Budget statement—that there is a good case for petrol prices to come down again? They seem to go up a lot quicker than they come down.

§ Mr. Lawson
My hon. Friend, who is an acute observer of petrol price movements, may well be right. I am glad to say that petrol prices have indeed come down since the Budget, just as I predicted that they should and would. I recall that the Opposition said that nothing of the sort would happen. I was right and the Opposition, as usual, were wrong. Petrol prices are lower than at the time of the Budget.

§ Mr. Gould
As the Chancellor presumably authorised the Governor of the Bank of England to announce the abandonment of sterling M3 as a monetary target, are we to assume that the whole disastrous monetarist experiment 1076 of the past seven years has been nothing more than a mistake? Has the Chancellor yet made up his mind—if so, perhaps he could let us into the secret—about what new mistake he intends to use to replace the old one?

§ Mr. Lawson
May I take this first opportunity to congratulate the hon. Gentleman, not merely on his election to the Labour party shadow Cabinet, but on his membership of the Opposition Treasury team? I read in one of the newspapers that his promotion to that job would add much-needed talent to a lack lustre Opposition team. I should like, on behalf of the Government, to associate myself with those remarks.
As to the hon. Gentleman's question, it is clear that, in the short time that he has been in his important job, he has not had time to read the Governor's lecture fully. I am sure that he will do so. As for the monetarist experiment to which he referred, I would observe that the proof of the pudding is in the eating and that it has brought inflation down to the lowest level for 20 years.