Will my right hon. Friend give a warm welcome to the announcement on Tuesday that producer price inflation is at the reduced level of 3.6 per cent? Does he agree that that figure, coupled with the figure for wage inflation which is also falling, means that British businesses can look forward to an excellent future in a highly competitive position vis-a-vis the rest of Europe, in which we shall be poised to improve on our present position?
My hon. Friend makes an important point, because producer price inflation is a good indicator of what we may expect in future for retail prices inflation. If we take out food, drink and tobacco, which were influenced by price increases in the Budget, producer output inflation was 2.7 per cent. in May, down from 5.4 per cent. a year earlier. That is the lowest rate of increase since June 1969. That is a very clear message and indicator of the way in which inflation pressure has abated in our economy. As my hon. Friend says, that bodes well for the future.
Is the target for inflation now 2 per cent., as the Chancellor says, or zero per cent., as the Prime Minister implies when he talks about stable prices? Does the Chancellor recognise the tendency of inflation to increase in the British economy when there is growth, or is he no longer worried about that now that the growth forecast has been revised from 1 per cent. to 0.5 per cent?
As the hon. Gentleman knows, we have said that our ambition is to get price stability. The hon. Gentleman may remember that we had a discussion about that in the Select Committee and said that, because of changes in the retail prices index, 2 per cent. was probably the equivalent of price stability because the index did not capture all goods and services that come on to the market. The hon. Gentleman is right to emphasise that we need to improve the working of the economy—the supply side—to ensure that we do not have a resurgence of inflation when growth is more firmly based.
Does my right hon. Friend agree that success in bringing down inflation is a prerequisite of lower interest rates? There has been a welcome fall in wage increases in manufacturing industry. Does my right hon. Friend agree that we need a similar fall in wage settlements in the public and service sectors?
I entirely agree with my hon. Friend. It is extremely important that the public sector sets an example and that wage settlements in the public sector are based strictly on what is affordable and what is needed to recruit and retain people in the public service. We cannot go beyond that or we would be asking the private sector to bear the whole burden of adjustment, which would be extremely unfair and unwelcome.
Does the Chancellor accept that the underlying rate of inflation, which excludes mortgage interest—which he has favoured in the past over the retail prices index and which is a more appropriate comparison anyway—still shows us performing worse than Germany and worse than the European average? Even that has been purchased at a horrendous cost in terms of recession and unemployment.
The hon. Gentleman should make himself clear—[HON. MEMBERS: "He has."] No, he is contradicting himself. First he says that the underlying rate of inflation is too high and then he says that the policies to get it down are too painful. I have always made it clear that we want not only to get the headline rate down but to get the underlying rate of inflation down. That is coming down and the differential between our underlying rate, minus mortgage interest payments, vis-a-vis that of Germany has narrowed considerably in the past year.