Bill Gleeson: Beware of the risk posed by rising inflation

Jan 30 2008 by Bill Gleeson, Liverpool Daily Post

THE coming days will see a growing clamour as the nation’s business lobbyists demand a cut in interest rates when the Bank of England’s Monetary Policy Committee meets next week.

In fact, those demands will be louder than they have been for a long time, because there is a mounting fear that Britain is about to get a taste of something it has long forgotten – namely recession.

The decision by the Federal Reserve in the United States to cut interest rates by 0.75% will fuel the clamour on this side of the Atlantic even further. It was very decisive action by the Fed, so much so it smacks of panic.

Now many here are calling for a 0.5% cut in UK rates. Such a deep cut is far from unprece-dented, but it is rare.

It was to avoid the pressure caused by such vociferous demands that the politicians off-loaded the task of setting interest rates to the Bank.

For years, Britain’s economy swung dramatically between boom and bust as our elected representatives made imprudent, short term decisions to satisfy voters.

Since the Bank took over the job more than a decade ago, Britain has enjoyed sustained growth, even when the US and other major nations have suffered recession or downturn.

Those responsible for the demands for big cuts must have forgotten the risk posed by inflation.

Inflation may have been under control for many years now, but should it rise sharply, other horrors such as high wage demands, falling competitiveness, an unstable currency and rising unemployment could set in and become hard to reverse.

The MPC should not be tempted to follow America’s lead. The issues affecting the US are very different to any problems we face, the depth of the credit crunch being the principal example.

It all goes to make next week’s MPC meeting compelling. It won’t be just the markets tuned into the outcome, business generally will be paying close attention.

Bank of England governor Mervyn King has already made his views about the gathering risk of inflation known. If he believes inflation is set to top 3% later this year, he and his colleagues on the MPC have no choice but to resist the siren calls.

* LITTLEWOODS Shop Direct’s wish to buy the debtors book, brand and customer database of Empire Stores is puzzling.

Empire is in an old-fashioned line of business that Littlewoods has been moving away from. Bradford-based Empire sold clothes through its catalogues using a large army of agents, typically women who wanted to earn some extra money by taking on part time work.

As with Tupperware parties, people would sell to their family, friends and neighbours. Affordable clothes and the availability of credit were a winning combination.

But, as Britain has become more prosperous, and people’s time more precious, the market has waned. Agents are less willing to tramp their neighbourhoods selling the company’s wares, and mainstream credit is much more widely available than it was previously.

But direct catalogue sales, where there is no agent, are still working, so the Speke company has refocused its efforts onto this market, using both the traditional print books and the internet.

And yet here the company is attempting to reverse the trend. This week’s move to acquire Empire stores’ brand and database is all the more confusing because Littlewoods’ new strategy appears to be working. Sales, particularly internet sales, have risen rapidly.

Littlewoods wouldn’t tell us how much it is paying for Empire, but I guess it was small change. Otherwise, the deal wouldn’t make sense.