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Inflation

Volume 178: debated on Friday 12 October 1990

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12.

To ask the Chancellor of the Exchequer how many countries in the European Economic Community currently have a higher inflation rate than the United Kingdom.

Does the Minister accept that the so-called Madrid conditions are a sham, especially in view of the Government's failure to get the rate of inflation down before entry into the exchange rate mechanism, and that the Madrid conditions were all abandoned in time for the Tory party conference? Is not it true that Britain has one of the highest rates of inflation in Europe because the Government are totally inept at running the economy? Without sound policies on investment and training, entry into the ERM alone will not undo the damage caused by the Government.

My right hon. Friend the Chancellor and my right hon. Friend the Prime Minister have made it perfectly clear that the Madrid conditions have been fulfilled—[Laughter.]

I am going to Madrid the weekend after next, but I am happy to say that unless the Madrid conditions have been framed and put in the Prado I shall not be paying them any attention on that visit.

Does my hon. Friend agree that high interest rates are highly inflationary, that they are particularly damaging to investment and that they are very damaging to manufacturing industry, which in my view is the sole non-inflationary creation of a sound economy? What does my hon. Friend intend to do to help manufacturing industry, which is so important?

We have a battle on our hands against inflation. Raising interest rates is an essential ingredient of that battle. The way that this country calculates the retail prices index considerably distorts the figure. The underlying rate of inflation in the United Kingdom is 8·3 per cent. which has to be compared with the European average of 5·4 per cent. If we look at the average over the past seven years, we find that inflation in the EEC was 5·1 per cent. and that in the United Kingdom it was 5·9 per cent. The difference, therefore, is not all that great.

Does the Minister recall that recently the Chancellor of the Exchequer told Brian Walden that he wished the Government to be judged on their record? Since the Government's record shows that they invented the tax and price index and then abandoned it, returned to the retail prices index and abandoned that, too, and adopted the underlying rate of inflation and then redefined it, is there any significance in the Government ceasing to refer to the underlying rate of inflation, or is there no significance in anything that they say?

Whatever problems we may have with inflation, there is nothing that we can learn from the Labour party—[Interruption.] The Opposition do not like this bit. When they were in office the average rate of inflation was 15·4 per cent. and the lowest was 7·9 per cent. The average rate of inflation under this Government has been 7·9 per cent. Our average, therefore, is the same as their lowest. Over the past six years, the underlying rate of inflation in Britain was 4·9 per cent. The lowest rate of inflation under Labour was 7·9 per cent., so there is nothing that we can learn from the Opposition.

What would be the effect on inflation of the 182 promises made by the Labour party in "Meet the Challenge: Make the Change"?

My hon. Friend makes a good point. The answer is that inflation would increase dramatically. During the past few years the Opposition have constantly told us to cut interest rates when that was inappropriate and to raise public expenditure. In the not-so-recent past they urged us to run a substantial public sector borrowing requirement. Had we taken any of those measures, inflation would be far worse than it is today.