EXCLUSIVE: Mervyn DID draft a letter to Gordon!

It's amazing what one finds in the rubbish bins behind Threadneedle Street!

Obviously the person who drafted this letter realised they didn't quite need it after all:


Dear Gordon,

As you may have noticed, inflation appears to be spiralling out of control. The consumer price index (CPI) is now at its highest since 1995, while the retail price index (RPI) is at its highest since 1991. I imagine it must be pretty embarrassing, presiding over an economic record worse than that of the Major administration, which Labour have been criticised so vocally over the past decade.

I feel duty bound to provide an explanation for this rising inflationary tide. I attribute it to a number of key factors, none of which are beyond the wit of man to cure.

1. House prices

House prices have spiralled over the past decade. This has a direct impact on RPI and has also facilitated unprecedented levels of equity withdrawal, fuelling consumer price rises.

House price rises are largely to do with property speculation. While interest rates can curb house prices to a degree, they are a blunt tool in that they also affect other lending and borrowing. High interest rates would, for example, reduce investment. One means of curbing property speculation without harming investment would be to introduce land value taxation, which economists recognise is among the least distortionary form of taxation. Sadly, the Government has shown no willingness to investigate this option.

2. Public spending

A grotesque rise in public spending over the past five years has increased inflation. A particularly egregious example has been overly-generous public sector pay rises that bear no relation to productivity gains.

3. Public borrowing

The Pre-Budget Report forecasts net debt at the end of March 2007 of £503.9 billion. This budgetary imprudence has injected massive liquidity into the public sector and the economy more widely. Effectively, more money is chasing the same number of goods.

4. Taxes

In the pre-budget report the Government added 1.5p/litre to petrol duty. This has been the major factor in the 2p rise in the cost of a litre of petrol, which in turn accounts for two-thirds of the rise in CPI last month.

5. Trade barriers

Cheap imports of goods from emerging Asian manufacturers has applied downward pressure on prices, particularly in clothing and electrical goods. Sadly, the Government and the European Commission (led by Trade Commissioner Peter Peter Mandelson) have imposed additional and ongoing quotas on Chinese textile imports. This is in breach of our commitments under the World Trade Organisation. The result is that customers have been forced to purchase more expensive European products, pushing up retail prices.

6. Immigration

The low inflation enjoyed by the UK over the past two years has been in part due to immigration. As my colleague, David, pointed out a couple of weeks ago, the availability of highly skilled Eastern European workers has kept wage demands within sensible limits. Sadly, the Government has decided not to take advantage of another wave of immigration from Romania and Bulgaria, instead imposing a daft and distortionary quota system. This has removed a further buffer against inflation.

As you will see from the above factors, there is a clear single cause of inflation. Sadly, it is beyond my authority to do anything about it. I think it’s over to you, old chap.

I remain your humble servant,

Mervyn.