Britain's annual inflation rate, bloated by Prime Minister Margaret Thatcher's changes in taxation, soared to nearly 16 percent in July, the highest level since the economic crisis of 1974-77.
Inflation in Britain is again rising much faster than in other major industrial nations, where current annual inflation rates range from 4 percent in Germany and Japan to 10 percent in France, nearly 11 percent in the United States and 13 percent in Italy.
The rise in the annual inflation rate here from 11.3 percent in June to 15.6 percent in July is a record increase in a single month. It was caused primarily by increases in the price of gasoline (to more than $2.50 a gallon) and in the sales tax added to the price of most goods and services. Thatcher ordered the increases to offset cuts in income tax rates.
The price of clothing, restaurant meals, alcoholic beverages, tobacco, transportation, fuel, furniture and household appliances -- all boosted by the sales tax increase -- rose sharply. Only food, exempt from the value-added sales tax, showed little increase as the seasonal prices of fruits and vegetables fell.
Thatcher's Conservative government is very concerned about the impact of a runaway inflation -- now expected to reach 20 percent before the end of the year -- on union wage demands and public acceptance of Thatcher's economic policies.
The treasury has therefore invented a new "tax and price index" that takes into account the effect of Thatcher's income tax cuts on each family's ability to pay the higher prices in the shops.
That index, to be issued each month along with the retail price index, showed an annual inflation rate of 13.4 percent and no increase at all from June to July.
"In other words," said Thatcher's financial secretary, Nigel Lawson, introducing the new tas and price index, "the income tax cuts in Thatcher's budget wholly offset the combined effects of the increase in value-added tax and the underlying rate of inflation between the two months."
The new tax and price index was immediately attacked as misleading by labor leaders.
"To undo the damage done the budget by fiddling around with price indices will rightly strike many people as preposterous," said David Lea, assistant general secretary of the Trade Union Congress. "We hope the government's ill-considered decision will not bring all indices into disrepute and open up a Pandora's box of different figures."
Business leaders, on the other hand, agreed with government arguments that the new tax and price index would be a more accurate measure of each family's purchasing power and would justify lower wage settlements in this winter's contract negotiations.
The Trade Union Congress said its members would ignore the new index and seek pay raises of 20 percent or more to cover inflation as it has been traditionally measured by the retail price index.
That index, said Trade Union Congress general secretary Len Murray, "demonstrates the extent of the damage caused by the government's budget. Prices in the shops, which, unlike the income tax cuts, affect everyone equally, are now siaring, hitting everybody's living standards."
Thatcher's income tax cuts, which were more generous for middle and higher income families, were intended to give business executives, middle managers and skilled workers the incentive to work harder to pull Britain's economy out of its steep decline. Her economic advisers believe that this year's increase in sales taxes should be enough to finance more income tax cuts in the future.
Thatcher's economic experts, led by Chancellor of the Exchequer Geoffrey Howe, also believe they can eventually reduce the inflation rate by tightly controlling the money supply, principally by using high interest rates to limit borrowing, and by slashing government spending.
hese measures, however, are also depresssing an already squeezed economy. The growing financial difficulties of private businesses short of money and the cuts in government spending are rapidly increasing the number of unemployed. The government announced today that it would close four more shipyards belonging to the government-owned British Shipbuilding, putting another 10,000 men out of work.
Thatcher's government is expected to be sorely tested this winter, when the labor unions threaten strikes to win pay raises to cover inflation and shorter work weeks to create more jobs, which Howe has said the economy cannot afford.