Inflation targets set by prime minister Gordon Brown would force 60,000 jobs to be lost, according to a study released today.
A report by professional services firm Ernst & Young’s Item club used the Treasury model to forecast the performance of the economy, and said the government’s inflation target of 2% would require a premium on interest rates, thereby forcing an increase in unemployment.
It said the impact of the surge in transport, energy and food prices around the world has yet to fully hit the UK, and the only way Brown’s 2% target could be met was a 60,000 increase in unemployment over the next two years, and a three quarter percentage point cut in gross domestic product (GDP).
Peter Spencer, chief economic adviser to the Item club, said it is the government, and not the Bank of England, that has an “important decision” to make about the nation’s future
“This is not a time for dithering,” said Spencer, adding that the government “must accept that the consequences will reflect its position on the trade-off between holding rigidly to the inflation target in the face of a major global shock or supporting employment”.
Spencer said the government has only two choices, either to stand by the 2% Consumer Price Index (CPI) inflation target – which will mean no more interest rate cuts for some time and hence weaker economic growth and a further deterioration in peoples’ living standards – or make an active choice about the inflation/growth trade-off and raise inflation targets for the next couple of years.