HL Deb 16 May 1990 vol 519 cc296-9

2.48 p.m.

Lord Dormand of Easington asked Her Majesty's Government:

What was the rate of inflation in May 1979 and what is their estimate of the likely rate of inflation by 31st December 1990.

The Paymaster General (The Earl of Caithness)

My Lords, the all-items RPI annual inflation rate for May 1979 was 10.3 per cent. Retail price inflation is expected to fall to around 7.25 per cent by the end of this year.

Lord Dormand of Easington

My Lords, is the Minister aware that it is 11 years since the Labour Government left office? Is he further aware that the trade unions are now well under control as the Government constantly remind us, and that we cannot import inflation these days because the countries with which we trade have a much lower rate of inflation than we have? Who is to blame for the 9.4 per cent. inflation rate?

The Earl of Caithness

My Lords, I am aware of the comparison that the noble Lord seeks to make. I am also aware that under Labour the average inflation rate was 15.5 per cent. whereas under this Government it is 7.9 per cent. As the noble Lord is aware, inflation rose as a result of looser monetary supply than we would have wished following the stock market crash when it was agreed by all nations that interest rates should be reduced. Indeed, the party opposite wished us to reduce interest rates even further than we did and more quickly.

Lord Hailsham of Saint Marylebone

My Lords, do I not detect an element of dejd vu about this Question, having regard to what took place at Question Time on Monday?

The Earl of Caithness

My Lords, my noble and learned friend is absolutely right. We are treading very familiar ground.

Lord Bruce of Donington

My Lords, in that case there will be no objection to retreading a little of the ground that was made a little obscure the other day. Is it not the case that the Government's record on inflation is not quite as unsullied as one might be driven to believe in that inflation reached 22.5 per cent. in the first quarter of 1980 and resulted in the decimation of wide sections of British industry? There is no need for the noble Earl to be so coy about the matter. If he cannot predict with any reasonable accuracy the degree to which inflation will fall marginally towards what it was, can he say when unemployment in this country is likely to decrease by a million to its level when the noble Earl's Crovernment took over?

The Earl of Caithness

My Lords, the noble Lord chided me the other day for straying from the Question on the Order Paper. The noble Lord seeks to do that now.

Lord Orr-Ewing

My Lords, can my noble friend say whether it is true that those who wish to maintain the value of their earnings need a wage increase of the same rate as inflation?

The Earl of Caithness

My Lords, my noble friend has raised a most important point. The headline rate of inflation is not a fair comparison for wages. A more appropriate measure would be the tax and prices index which showed a rise last month to 7.7 per cent., which is considerably different from the headline rate.

Lord Hatch of Lusby

My Lords, this Government have now been in office for 11 years. They have always said that their first priority is to reduce inflation. Who is responsible for the fact that inflation has risen rapidly over the past two years, particularly in view of the bonus from oil revenues? Whose responsibility is it? Is it not that of the Government? Is it not the case that so far as concerns inflation the Government's policies are seen to have failed utterly?

The Earl of Caithness

My Lords, it is the Government's duty to bring inflation down, and we shall succeed in doing so. One of the reasons for the substantial rise in the headline rate of inflation was the change from rates to the community charge when local authorities applied the equivalent of a 34 per cent. rate rise which added 1 per cent. to the index. I hope that the noble Lord will take this opportunity to condemn those high-spending local authorities.

Lord Harmar-Nicholls

My Lords, does my noble friend agree that the only alternative to the present system, which has been suggested from time to time, is credit control? Can he tell me which other countries have used credit control as a means of contain ng inflation?

The Earl of Caithness

My Lords, using credit control to reduce inflation does not work. As Mr. Greenspan, the chairman of the board of governors of the Federal Reserve, said: In the short run the Federal Reserve can hold down nominal interest rates but the result largely would be more inflation". More apposite to us is the Bundesbank's remark: The Bundesbank can only work indirectly by appropriate fixing of interest rates". It is clear that interest rates is the method by which we can bring down inflation.

Lord Williams of Elvel

My Lords, will the noble Earl respond precisely to the question put by his noble friend Lord Harmar-Nicholls? How many countries use credit controls in the fight against inflation?

The Earl of Caithness

My Lords, I do not know the exact number, but all European countries use interest rates.

Lord Molloy

My Lords, have the Government considered a possible alternative to raising mortgage rates to astronomical levels, which causes great unhappiness and homelessness, with the excuse that they are combating inflation? Why should they deliberately create homelessness and anxiety among people who can no longer afford the houses which they began to purchase a few years ago with the excuse that there is no other solution to bringing down inflation?

The Earl of Caithness

My Lords, the result of the increase in inflation has been high interest rates, which inevitably react on mortgages. I know that the noble Lord will agree with me that inflation is ultimately much more serious than high interest rates. The noble Lord will recall that in the 'seventies pensioners' savings were reduced by a third during the term in office of the Labour Government due entirely to inflation. Under this Government those savings have risen.

Lord Stoddart of Swindon

My Lords, is the noble Earl aware that most other countries require the banks to place a significant proportion of their deposits at the central bank? Will not the Government reconsider their policy and insist that the banks place at least 8 per cent. of their deposits with the Bank of England, which would damp down credit and make a considerable contribution towards bringing down the rate of inflation?

The Earl of Caithness

My Lords, I believe that the noble Lord is referring to the minimum reserve requirements of some banks. That is merely a device to control interest rates. The German constitution will not permit the banks to act in the way that the Bank of England can through Treasury bills. Therefore they use an alternative method known as the minimum reserve requirement. That is purely a device to control interest rates.

Lord Dormand of Easington

My Lords, is the Minister aware that last week in another place the Prime Minister said, in dealing with the problem of inflation, that the Government: got the growth going a little too fast"?— [Official Report. Commons, 8/5/90; col. 17.] How does he explain the difference between that reason and the one that he has given me? In addition, will he give a little more detail as to what is meant by: got the growth going a little too fast"?

The Earl of Caithness

My Lords, there was a substantial amount of growth in the economy. There has not been for many years such a long, sustained period of growth as under this Government. That, combined with the loosening of monetary policy following the stock market crash, has led to inflation. That is why we need high interest rates to bring it back down.