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Inflation: International Trends

Volume 476: debated on Thursday 12 June 1986

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3.18 p.m.

My Lords, I beg leave to ask the Question standing in my name on the Order Paper.

The Question was as follows:

To ask Her Majesty's Government what has been the movements in the last year in consumer prices in West Germany, Japan, the United States of America, France and the United Kingdom, and what is their response to these movements.

My Lords, in the year to April 1986 the rate of inflation was minus 0·2 per cent. in West Germany, 0·9 per cent. in Japan, 1·6 per cent. in the United States of America, 2·7 per cent. in France, and 3 per cent. in the United Kingdom. The Government are gratified by the fall in inflation in the United Kingdom and are also pleased that inflation has fallen in other countries.

My Lords, why is it that, taking those major industrial countries, inflation in this country is higher than that of any of the other industrial countries mentioned, while at the same time the rate of unemployment is also higher?

My Lords, it is for a whole variety of reasons—though I often suspect that the noble Lord thinks that he knows the answer even before he asks his question on these particular occasions. We are now looking at a number of very complex matters, and relating unemployment directly to the current rate of inflation is something that I have been doing month after month after month, in drawing everyone's attention to the importance of moderating wage claims.

My Lords, is it not a fact that in this country, in the past year or so, wage increases have considerably exceeded the rate of inflation? Do not the trade unions have a constructive part to play in helping to restrain wage increases and therefore limit our costs of production?

My Lords, it is true that if we look at the tax and price index it would be necessary to receive a wage increase of 1·2 per cent. to maintain one's standard of living. Nevertheless, within manufacturing industry the increase was 7½ per cent. and that is probably the largest real increase for decades. That is not good news for employment in the future.

My Lords, does not the Secretary of State agree that probably one of the most hopeful ways of dealing with the problem is a full development of the Chancellor's ideas—which were of course other people's ideas, too—on increasing the profit-sharing element in the return to labour?

My Lords, may I say to the noble Baroness that I completely agree with her. I hope very much that the whole idea of profit sharing will commend itself to both sides of industry so that we can see a more fruitful way forward to bringing back manufacturing profits to this country.

My Lords, may I ask my noble friend, in relation to the reduction in inflation in the manufacturing countries mentioned in the Question, how far that is due to the fall in oil prices and raw materials?

My Lords, it is an interesting position. In 1984, unit labour costs in manufacturing were running at 2½ per cent. increase. Material and fuels purchased by manufacturing industry were running at 8½ per cent. increase and output prices went up by 5½ per cent. This year, materials and fuels purchased by manufacturing industry are running at minus 11 per cent. However, unit labour costs are increasing by 4½ per cent. Putting the two together, output prices are going up by 4 per cent. If unit labour costs could have been contained we might have seen output prices showing little or no growth and be in a similar position to that of our competitors.

My Lords, does not the noble Lord agree with the comments of Mr. Lamfalussy, the chairman of the Bank for International Settlements, that the generalised fall in the inflation rate of the major industrial countries has been largely due to the very sharp fall in commodity prices, including oil? Does he further agree that this fall has had a severe impact on the national income of commodity exporting countries? Does not the noble Lord recognise that Australia falls into the latter catogory and that it is a tax on the Australian Labour Government, who have been a consistent friend of this country over the years? To say otherwise does neither the Secretary of State nor his Government any credit.

My Lords, I think I accept the tenor of the noble Lord's remarks. Of course, in my comments on the Australian Labour Government I did no more than repeat the words of the Finance Minister of that Government.

My Lords, the noble Lord is constantly telling us about the success of the British Government's economic policies, but why is it that compared to all our major industrial and manufacturing competitors inflation has risen faster here and is at a higher rate than that of any of our competitors while—and I have asked him this before—the unemployment rate is also higher than that of any of our competitors? How do the Government's economic policies deal with this issue of competition from our major competitor nations?

My Lords, the noble Lord has brought into one supplementary question inflation, unemployment and competition. Perhaps I may at least answer part of that question by saying that, compared with OECD countries as a whole, today we have a narrow gap of 0.4 per cent. which is narrower than it has been for many years, and particularly during the period 1974–79 when the gap was 6·1 percentage points.

So far as unemployment is concerned, on occasion I point out in your Lordships' House that Germany has seen unemployment rise by over 80 per cent. in the past three years; France and the United Kingdom have seen it rise by 35 per cent. and 37 per cent., and other European countries are midway between the two.

My Lords, does not the Secretary of State agree that, since he has now admitted that the problems in Australia are in no small part due to the fall in commodity prices, it is not accurate to say, as he has done on a number of occasions, that those problems arose from the fact that Australia was investing in the infrastructure?

My Lords, I did no more than repeat the words of the Finance Minister, who said that the current economic policy has to stop if Australia is not to turn itself into a banana republic. I do not know how much more I have to say about that except that Australia went in for infrastructure spending and today it has rising unemployment, balance of payments problems, soaring inflation, and a Finance Minister who at least is dissatisfied with the present state of Australia's economy. That is the lesson I wanted to draw from infrastructure investment.