Globalisation puts pressure on prices

The inflation rate's fall to a record low last year despite robust growth provides fresh evidence that Britain has a "new economy". Official figures published yesterday showed the annual rate of underlying inflation, excluding mortgage payments, averaged 2.1% in 2000, the lowest figure since records began in 1976. Had it not been for last year's surge in oil and petrol prices, the inflation rate would have been even lower.

Meanwhile, the latest growth figures, covering the first nine months of the year, suggest that gross domestic product continued to expand by more than its historic rate of 2.25-2.5% per annum.

City analysts said the combination of strong growth and falling inflation so late in the economic cycle, would strengthen the hand of the doves on the Bank of England's monetary policy committee.

While some of their colleagues have been arguing that the weakness of inflation is a temporary aberration caused by the strength of the pound, Sushil Wadhwani and DeAnne Julius say profound structural changes, such as increased global competition and new technology, have permanently improved the trade-off between growth and inflation.

David Walton, senior economist at US investment bank Goldman Sachs, said Mr Wadhwani and Ms Julius would take heart from yesterday's figures which showed the biggest decline in clothing and footwear prices since 1949 and the steepest reduction for household goods since 1959.

"The fact that growth has been stronger than expected and inflation lower than expected certainly suggests the supply side of the economy is working better than in the past," said Mr Walton.

"Presumably the MPC will learn from this experience and you would think that, at the margin, it might mean that they will allow the economy to grow a little faster in the future than it has traditionally felt comfortable with."

Although interest rates were left on hold last week for the 11th month in a row, economists say the case is mounting for a reduction to bring inflation back in line with the government's 2.5% target.

Kate Barker, chief economic adviser to the Confederation of British Industry, said: "There's still a worry about what's happening to pay around the turn of this year - anecdotal evidence suggests it may be picking up. But the weakness of inflation argues strongly for a cut."

The "new economy" thesis was given backing by John Vickers in his first big speech since becoming director general of the office of fair trading.

Mr Vickers, a former member of the MPC, cautioned that globalisation and new technology did not necessarily mean competition was king.

While the internet allowed consumers to shop around for the lowest prices, producers could now gather more information about customers and use it to segment markets for greater profit.

The explosion of cross-border mergers and acquisitions could also stifle product market competition and firms which set standards for the new industries could build up market power in due course which could be abused.

"This point is hardly new to the era of Microsoft and the internet," said Mr Vickers.

Nevertheless, Mr Vickers said that on balance, globalisation was likely to be far better for consumers than the alternative of closed markets that did not work.

"The main point to stress in conclusion is that the implications for competition policy of globalisation are likely to be positive," he said.

In a speech in Sheffield last night, the Bank of England's governor, Sir Eddie George, defended the committee's record, saying the inflation undershoot over the past two years was "marginal".

Giles Radice chairman of the Commons treasury committee, said MPs would be investigating the performance of inflation over the past three years and asking whether policy had been too tight.

• Mr Vickers announced that the OFT would be setting up an advisory panel to support him pending legislation required to make the OFT into a fully fledged competition authority with a board.

In a speech to the European Policy Forum, he said the size and make up of the panel was still under review but added that bringing in outsiders would widen the OFT's perspective.