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The inflation lie – how it works and how you’ve been hoodwinked

Inflation has fallen to its lowest level in 25 years, the Bank of England announced this week. There is even the risk of ‘negative inflation’ in the months ahead.

In today’s missive, we attempt to pull the wool back from over your eyes, as we explain the government racket that is inflation.

The manipulation of language for the purposes of obfuscation

Manipulation of language? The worlds of politics and finance are full of it (pun intended).

Say the word ‘capitalism’ to someone who reads the Guardian and they think it is a system advocating the exploitation of the weak.  Say the word ‘socialist’ to someone who reads the Daily Mail and they’ll think you mean a system whose only aim is the complete removal of all individual responsibility while rabidly taxing any sort of productive endeavour for the sole purpose of funding lesbian awareness officers.

What a Guardian-reader thinks is capitalist is actually crony-capitalist. What a Mail-reader thinks is socialist is actually crony-socialist. The meanings of the words have been distorted.

And so it is with ‘inflation’ and ‘deflation’.

To inflate means to blow up. It’s what you do to a balloon. Deflate means the opposite. It’s what you do to a politician’s bicycle tyre.

So, before the Orwellian doublespeak was employed, inflation once meant ‘an increase in the supply of money and credit leading to higher prices’. Deflation meant the opposite – ‘a decrease in the supply of money and credit leading to lower prices’.

However, a politician or a central banker will now say that inflation means rising prices and that deflation means falling prices.

The distinction is very important, because that’s where you’ve been done over. The simplicity of the central banker’s definition is what magicians call a ‘misdirection’.

I’ll explain.

The sleight of hand that is inflation

The official method to measure prices is the Consumer Price Index (CPI). It tracks the prices of things we commonly use – food, clothing, transport, energy and so on. When a politician or a banker talks about inflation or deflation, all they are really talking about is the prices of goods in the CPI.

From 1989 to now CPI has averaged just 2.8 per cent per year.

But the amount of money circulating in the UK has been ‘inflated’ at an average annual rate of 11.5 per cent over the same period.

In 1971 there was £31bn in circulation. Now there is just under £2,100bn (that’s £2.1 trillion). That is a 67-fold inflation (see, I’m using the word correctly and suddenly it makes sense) of the supply of money.

There are very few families, however, that are 67-times richer. I know mine isn’t.

That’s largely because wages have not kept up with the 67-fold increase in money supply. They’ve gone from about £2,000 in 1971 to around £25,000 today. So many families now find themselves having to work longer hours, with both spouses in the workplace, taking on larger debts and having fewer children just to maintain an ordinary middle class lifestyle. Their children face unprecedented levels of debt and, in many parts of the country, will never be able to buy a house.

Where the money’s gone

Research by think-tank Positive Money shows that only about 10 per cent of this newly-created money has gone into the kind of consumer goods tracked by CPI.

So all CPI does is measure the effects of about 10 per cent of money creation.

What’s more, many of the goods tracked by CPI face the deflationary pressures of competition and improved productivity. For example, farm goods, electrical goods, any mass-processed goods tend to fall in price.

Positive Money’s research shows that 13 per cent of newly-created money has gone into real businesses that create jobs and boost economic growth; 37 per cent into financial markets and 40 per cent into residential and commercial property.

But, guess what? Financial markets and house prices are not included in CPI – so the effects of all that money creation is simply ignored, and the pockets of the few that operate in these sectors are lined.

With stock, bond and London property prices all at record highs, for the Bank of England to be ‘warning ‘ about deflation is disingenuous.

Why deflation is not necessarily a bad thing

Deflation is painted as a bad thing. The Bank is always ‘warning’ about it. It is something we ‘slide’ towards. It is bad for the economy, we are told, because people are put off making purchases if that they think items will be cheaper in the future. That is not necessarily so. Has the fact the smart phones will be cheaper and better next year stopped you buying one this year?

And even if it is true, so people save rather than spend – what’s the problem with that? They might actually be able to look after themselves in their retirement.

It’d be great to have a money that buys you more each year instead of less. The 19th century saw 100 years of deflation. It also saw the greatest earnings growth and improvement living standards in all recorded history.

Deflation suits people with savings and low levels of debt. It suits earners. But the whole economy, as it currently stands, is rigged against such people.

How the game is rigged in favour of the few

The way the Bank of England addresses inflation is to raise interest rates.  But higher interest rates will cause house prices to fall – and falling house prices between 1989 and 1994 made the Tories unelectable for half a generation. They’ll do anything not to put them up.

For five years between 2008 and 2013 official inflation was 3 per cent. The Bank of England has a mandate to keep inflation at 2 per cent. Yet still rates were kept at the unprecedented 0.5 per cent. The BoE even created £375 billion through quantitative easing to keep rates suppressed.

The whole game is about propping up asset prices – be it stocks, bonds or houses. And a key part of that game is obfuscating inflation and fear-mongering about deflation.

That’s why it is extremely useful to have an official measure that ‘proves’ that inflation is low, especially one that ignores 77 per cent of new money-supply.

If you owned the assets or you operate in the sectors that have benefited from all this newly created money – the financial sector and the London property in which it mostly lives – you’ve made spectacular gains. But if you don’t, you got left behind.

What is happening is an insidious transfer of wealth from those that don’t own the right assets or operate in the right sectors to those that do.

The monetary system actually causes the wealth gap.

Low interest rates penalise labour and reward capital and assets. That is the simple mantra to remember.

To all those people in the Guardian who rail against wealth inequality – raising income tax is not the answer. That just further penalizes the productive.

The answer is an honest system of money.

Dominic Frisby is author of Life After The State and Bitcoin: the Future of Money.

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