Inflation Prospects (Hansard, 13 July 1995)

§ 1. Mr. Riddick
To ask the Chancellor of the Exchequer if he will outline the prospects for inflation. [32468]

§ 11. Mr. Austin-Walker
To ask the Chancellor of the Exchequer what he expects the rate of inflation to be at the end of 1995. [32557]

§ The Chancellor of the Exchequer (Mr. Kenneth Clarke)
I expect inflation to increase a little towards the end of 1995, to 3 per cent. in the fourth quarter. That increase reflects the impact of higher import prices, and is expected to be temporary. I expect inflation to fall back during 1996, to 2½ per cent. by the fourth quarter.

§ Mr. Riddick
Does my right hon. and learned Friend agree that low inflation is a crucial factor in the creation of more wealth, more investment and more jobs? Does not he find absurd the way in which the shadow Chancellor on one hand appears to be for ever calling for lower interest rates but on the other has started to criticise my right hon. and learned Friend for not agreeing with the Governor of the Bank of England, who wants interest rates to increase? Will he assure the House that his inflation policy will be based on sound economics and not soundbites, so beloved by the hon. Gentleman?

§ Mr. Clarke
I agree with my hon. Friend that the overriding aim of all economic policy is increased prosperity and more secure jobs. It is essential that we 1072 deliver low inflation in order to guarantee those and deliver those. We have been more successful on the inflation front in the past two years than at any time in the past 30 years. That has been as a result of the conduct of monetary policy and the determination of the Governor and myself to take no risks with inflation.
The Opposition always used to demand lower interest rates, come what may. Even in the late 1980s, they were demanding lower interest rates when they had to increase. The hon. Member for Dunfermline, East (Mr. Brown) always used to demand lower interest rates on every occasion, but he has stopped doing that for the past six months. As far as I can see, he has no opinion at all about interest rates or inflation that he will share with anyone at the moment.

§ Mr. Austin-Walker
Today's inflation rates show that the figures have already exceeded the figures that the Chancellor estimated in his Budget speech. The Chancellor of the Exchequer has given several different figures at different times. Would he say what he really anticipates the figure to be? Does the Governor of the Bank of England agree with his optimism about inflation rates and, more importantly, in his estimates has he consulted the First Secretary?

§ Mr. Clarke
The figures today entirely coincide with the summer forecast, which we debated yesterday, and the answer that I have just given about the likely pattern of inflation. There is absolutely no doubt about the inflation target among anyone who takes it seriously; it is 2½ per cent or less by the end of this Parliament and through the next Parliament. People try to reinterpret that, but I set the policy. They are my decisions and I repeatedly say plainly on what basis I am setting them all the time. I work with the Governor of the Bank of England, with whom I discussed those decisions, and he and I are determined to achieve the Government's stated inflation target.

§ Sir Peter Tapsell
May I congratulate my right hon. and learned Friend on the impeccable judgment on interest rates that he has shown so far, especially in resisting the considerable pressures for him to increase interest rates a few weeks ago, just before the American and Japanese rates were lowered, and set off a world bull market in bonds?

§ Mr. Clarke
I always have the greatest respect for my hon. Friend's advice. That is because he is always constructively but fairly critical when he feels critical and I am grateful for his agreement when he gives it. I believe that the economic evidence supports the decision that I took. I am grateful to know that it has his full support. I do wish that someone on the Opposition Benches had a serious opinion to offer on the subject.

§ Mr. Malcolm Bruce
Does the Chancellor accept that irresponsible tax cuts would worsen the outlook for inflation? Does he accept the discipline of his own words—that public borrowing is taxation deferred? Does he accept that, if he introduced tax cuts which could be funded only by increased borrowing, they would be bad for inflation and would have to be reversed soon afterwards, perhaps after a general election?

§ Mr. Clarke
I hope that we are all against irresponsible tax cuts. I am against doing anything that is irresponsible. We will not have tax cuts unless we can afford it. What 1073 we have done so far is to halve the public sector borrowing requirement over the past two years and we have set it on a firm downward course, aiming at our clearly stated intention of achieving balance over the medium term. Tax cuts will come, but only when we can afford them and when it is in the interests of the economy to have tax cuts.

§ Mr. Darling
Inflation has edged up today. Can the Chancellor explain why it has now emerged that the Central Statistical Office wrongly calculated the rate of inflation over the past few months and understated the rate of inflation? Can he also explain why he insists on maintaining not just one but three different targets for inflation? He used the figure of 2½ per cent. for the City and the figure of 3 per cent., which he said would be a triumph, for a newspaper interview.
In his own hand, the right hon. and learned Gentleman wrote to the Chairman of the Select Committee on the Treasury and Civil Service saying that his target was in the range of 1 per cent. to 4 per cent. most of the time—in other words, not all the time. Is it any wonder that people do not believe him when he says that he has a target? Is it any wonder that people believe that the Government will take risks with inflation if that is what it takes to win the next election?

§ Mr. Clarke
First, it is true that an error was made in calculating inflation for two months earlier this year. The Central Statistical Office has explained that it was a straightforward error. Someone made an error in the calculation which led to an under-recording by 0.1 percentage points in the months of March and May 1995. The new director insists, in his press release, on accepting personal responsibility for this, although he has been in post for only a fortnight. It was one of those human errors which we all make.
Secondly, I find this level of political debate absurd. One thing that I do in explaining Government policy is to state clearly what the objectives are. The inflation forecast is 2½ per cent. or less. In the same way, the Prime Minister and I made perfectly clear our attitudes towards such things as inheritance tax and capital gains tax. The press is capable of taking any daft half-quotation to claim that what we say is not what we claim to say. These bad habits are extending even to the Chamber and are lowering the Opposition's performance. I could not have been clearer in every statement I have made that the inflation target is 2½per cent. or less from the end of this Parliament. I set the policy and I am telling the hon. Gentleman what the policy is on which I set other policies.

§ Mr. Ian Bruce
Will my right hon. and learned Friend resist the calls which come from some people who say that a bit of inflation would be good for negative equity and for house owners? Does he agree that there has never been a better time in the past decade or so for people to buy their first new home? We have low inflation rates which means low interest rates. That makes buying one's own home very affordable and that is the right way in which to get the house market moving again.

§ Mr. Clarke
I agree strongly with my hon. Friend. If the public feared that we were going back to what would begin as a bit of inflation, which would mean higher interest rates and the old double figure levels, it would be extremely damaging to the housing market. It is the fact that some people still fear that we may do that that is 1074 holding back purchasers from the excellent bargains at affordable prices in the market. I hope that the expert opinion of people such as our hon. Friend the Member for East Lindsey (Sir P. Tapsell), with his view about where interest rates are likely to go—at a time when they are well below half the peak that they hit at similar stages in the economic cycle in the past—will have some effect on those contemplating house purchases.