Yet more Tory economic stupidity
6:13 pm - December 16th 2008
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I don’t want to make a habit of defending Yvette Cooper, whom I’ve always thought of as the poor man’s Ruth Kelly. But for Iain Dale to accuse her of economic illiteracy is rather like Ann Widdecombe calling her ugly.
Ms Cooper says:
We have never had a policy of targeting the pound. Our policy has been to target inflation.
To which Iain replies:
Last time I looked at the laws of economics they told me that a weak currency means the price of imports goes up, which leads to higher prices, therefore higher inflation.
But there ain’t no law about it. If exporters price to market – that is, accept the prices prevailing in their target market – a weaker pound will lead not to higher prices but rather to a squeeze upon exporters‘ profit margins.
A similar thing can happen if buyers have monopsony power.
Tesco (say) might have sufficient power over some of its foreign suppliers to resist any price rise. But even if this isn’t the case, inflation only rises relative to what would otherwise happen. It doesn‘t necessarily rise relative to its past level.
This point matters if sterling falls because of the weakness of the economy. In such an event, it’s quite likely that weak demand will have more effect in depressing inflation than the fall in sterling will have in raising inflation.
All this is a way of explaining the chart. It shows that big changes in sterling have little impact upon inflation (I’ve put both on the same axis to highlight this fact). For example, sterling’s fall when we left the ERM did not lead to higher inflation. Nor did its rise in 1997-98 lead to lower inflation.
So, Ms Cooper is quite right to be relaxed about the weakness of the pound (for now at any rate), and Iain is wrong to suggest it will lead to higher inflation. This continues a pattern for Tory commentators’ attacks upon Labour’s economic policies to be just plain stupid.
Which is odd, because there is much that has been genuinely wrong about these policies.
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Chris Dillow is a regular contributor and former City economist, now an economics writer. He is also the author of The End of Politics: New Labour and the Folly of Managerialism. Also at: Stumbling and Mumbling
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Story Filed Under: Blog ,Conservative Party ,Economy ,Labour party ,Westminster
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Reader comments
If exporters price to market – that is, accept the prices prevailing in their target market – a weaker pound will lead not to higher prices…
Quite a big if though, Chris isn’t it?
Accept the monopsony point more readily.
Still think Brown’s focus is disastrously wrong,a million times over. Borrowing in the wish that consumers spunk it away, instead of infrastructure? No thanks
So what is Dale asking for? Rise in interst rates?, yea that will go down great at this time.
Furthermore, the Bank of England is rather more worried about deflation right now than inflation, so even if prices go up slightly thanks to a lower pound, it may not be such a bad thing…
If you read the whole piece Comrade Dale calls for government intervention in the currency markets- he spent a bit too much time in Russia methinks.
“If you read the whole piece Comrade Dale calls for government intervention in the currency markets-”
Oh that’s priceless. I thought the Tories were for the free market and let the currency fall where the market says.
Me thinks the Right is getting twitchy about the rise of the Euro.
…it’s quite likely that weak demand will have more effect in depressing inflation than the fall in sterling will have in raising inflation.
So, the good news is that production cutbacks, staff layoffs and wage cuts (resulting in reduced spending) will prevent any rise in inflation that otherwise would’ve occurred because of the fall in Sterling’s value. Splendid!
The price of many things are based on the dollar rate – oil is a good example. This can have a detrimental impact on our economy if there is a severe devaluation.
OK if you want to haggle about a plasma TV from China then fine.
A weak pound is OK for exports but given that our manufacturing base is a fraction of what it was there are fewer benefits than there could be. I guess it makes the UK workforce look cheaper for Honda / Toyota / Nissan and the other great British car manufacturers.
Alisdair – nothing hangs on the pricing to market point. The key fact is the chart, which shows no link between (big) currency moves and inflation.
I mentioned pricing to market only as one, of several, possible explanations for that non-relationship.
But there ain’t no law about it. If exporters price to market – that is, accept the prices prevailing in their target market – a weaker pound will lead not to higher prices but rather to a squeeze upon exporters profit margins.
If if if ? What cock.! If the pound goes down the”cost” of imports goes up if this that and the other all sorts of micro effects can skitter to and fro but overall the cost of imports goes up , simple. There seems to be a mistaken view on this site that quibbling and whinging at the edges is the same thing as joining a debate . This is an especially tiresome example.
Yvette Cooper was on the Marr-athon and was being asked to explain why it was since we were better prepared than other economies the pound was falling fast against both the EU and the dollar . There is no explanation except that she had been parroting the preposterous Labour lies in the first place and “ We are not targeting the exchange rate” was about the only thing she could come up with .
What she actually means is that Labour are quite happy to see endless importers go to the wall so long as Labour can manufacture a little jolly news for their election early next year before the problems unemployment and tax rises kick in.
You are right in this sense , inflation is not an issue , costs however , a rather different thing are . You are also right that Iain dale is not greatly interested in economics but you do not have to be to pick holes in the atrocious prattling Ms Cooper who had the gravitas of a gnat by comparison the John Major who pulled her wings off like a helpless insect on the same show . I daresay you thought he was”just plain stupid ” as well. I think not .
I see Yvette Cooper as the archetypal modern Labourite: bitter, humourless and aggressive. Her only redeeming quality is her ability to rote learn the propaganda line. Her defence of the disastrous HIPs was comical.
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