15/02/2011

Why Cameron should really fear inflation

As inflation continues its progressive march, now reaching 4%, David Cameron should fear it beyond the normal economic arguments.

The baby boomer generation (full disclosure that just about includes me) lived through the high inflation of the 70s and 80s and remembers it as a very unpleasant experience. In the 70s it was accompanied by, and in part driven by, excessive wage claims backed up by strikes which disrupted everyone's lives. I remember as a young apprentice soldier having an inflation adjustment in my monthly meagre pay packet which on the surface seemed quite nice, but that was more than offset by the almost daily increases in the price of blanco.

In the 80s it was also accompanied by strikes and restructuring the economy. Some of the strikes were violent and very few who lived through that era will not be scarred in some way by the scenes of the miners and police in pitched battles.

So without getting in to a cause vs correlation argument inflation is associated with civil disruption and civil disobedience but more pertinently for us baby boomers is what it did to savings. We are all well aware that those who suffered most in that period were pensioners and others trying to get by on a fixed income and this is Cameron's problem, baby boomers are now starting to retire and looking at living on a fixed and reduced income. It may only be the first few now but in 4 years it will be peaking.

Of course what these baby boomers will forget, or at least pretend to forget, is how much they benefited from inflation at the time. That same inflation eroded their mortgage debt very quickly and gave them the perception of wealth through house ownership but that won't be forefront of their minds as they consider what inflation is doing to their savings. Self interest, especially when they read stories like this:

The NHS is failing to treat elderly patients in England with care, dignity and respect, an official report says.

The Health Service Ombudsman came to the conclusion after carrying out an in-depth review of 10 cases.

The ombudsman, which deals with serious complaints against the NHS, said the patients - aged over 65 - suffered unnecessary pain, neglect and distress.

will be the order of the day.

Its also well known that older people are more likely to vote  and this is where Dave's problems will lie come the next general election in 4 years time. If he doesn't kill inflation there will be a backlash by the grey vote that could see the Tories and LibDems thrashed out of sight. It won't matter that Labour's policies would have probably caused more inflation and higher debt, the incumbent quite rightly gets the kicking.

But at the same time if he doesn't tackle the deficit and debt continues to increase there won't be any money to provide the services that these baby boomers will also be demanding.

So here's his conundrum - the simplest way of reducing the deficit and debt burden is inflation. It would also avoid, or at least reduce, those nasty cuts that we are starting to endure (how will we ever live without a library?) and which will only get worse. As Ken Clarke warned the middle classes don't really understand what is about to hit them.

So damned if if does and damned if he doesn't, but my betting is that he fears the backlash in 4 years time more than the current political storm.


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