AN old ghost has returned to haunt us – inflation. Prices are now rising in the UK at their highest in 40 years. By the latest CPI measure, prices in Britain are rising at an annual equivalent of 9%. That is the highest rate among the big G7 industrial nations. The IMF thinks that the UK will be the last advanced economy to see inflation moderate. In other words, the so-called cost of living crisis will be with us for some time to come.

And that’s not the end of the bad news. The Consumer Price Index (CPI) is only one way the government measures inflation. This takes a basket of some 700 common goods and tracks how they shift in price, then indexes the result. The meaningfulness of this exercise depends on what goods the statisticians decide to count. As they have only just added tins of baked beans – a British family favourite – you’d be right to be suspicious. But that’s not the half of it.

The CPI measure does not count household mortgage costs. Again, you might think that mortgage costs are important to most families. But if you track mortgages as part of inflation, you end up with a bigger number than the CPI measure. The so-called Retail Price Index (RPI) includes mortgages. In the year to April, RPI was running at 11%, compared to the 9% under CPI.

This matters. The Westminster government links increases in many state benefits, including Universal Credit and pensions, to the rise in CPI. But CPI deliberately understates the true impact of inflation for homeowners. Which explains why Gordon Brown, when he was chancellor, switched to tracking CPI rather than RPI, in order to save money. No flies on our Gordon.

READ MORE: An independent Scotland could keep pound for years, Ian Blackford says

But the Tories are just as bad. Chancellor Sunak is planning to scrap measuring RPI inflation altogether, by 2030. Now if you are in a defined pension scheme, your annual pension goes up by RPI. By scrapping RPI and substituting a new measure – one that undercounts inflation more than even CPI does – the Treasury and private pension providers will pay out less. Welcome to yet another inflationary rip-off.

We all know that inflation is the result of dearer energy costs, global supply chain disruption post-Covid and now the impact of the Russo-Ukraine war on food supplies. But why is inflation in the UK worse than elsewhere? One obvious culprit is Brexit. For starters, Brexit has caused significant labour shortages in Britain as EU nationals went home. On top of that, the trade barriers introduced by leaving the EU have added new, unnecessary costs for businesses.

But there is another factor to take into account: exchange rates and the value of the pound. Since the 2016 Brexit vote, the pound sterling has been losing value against the US dollar and other currencies. It has fallen hard this year. This is partly because of a loss of confidence in the UK by foreign investors. And partly because the Bank of England has continued to keep interest rates low compared to the United States. You get more for your money if you shift it to America.

A falling pound adds to inflationary pressures. Britain imports the majority of its energy needs and just over half of its food. But if a pound is worth less to the dollar, we need to spend more pounds to buy the same amount of imports. That is precisely what is happening now. As well as the actual cost of imported gas going up, we have the double bind of forking out more pounds to buy the dollars to get the gas. Other countries – America and France, for instance – do not import energy to the same degree as the UK. Hence our higher inflation rate.

The Bank of England is now predicting that UK inflation will be over 10% CPI by the end of the year. This is the same Bank of England that told us last October that inflation was temporary and would soon go away. On that record, who knows where inflation is headed. What we can be sure of is that the bank intends to raise interest rates, as a response. This is meant to stop folk spending, and so reduce demand and prices. That’s OK if you are the governor of the bank, Andrew Bailey, and earning £495,000 per annum. If you can’t afford to pay your gas bill, then the Bank of England putting up your mortgage costs might not seem such a good idea.

Remember the case of the village in Vietnam that the Americans had to destroy “to save it” from the Vietcong? The same logic holds for the bank raising interest rates to curb inflation. I don’t doubt that if you raise interest rates, inflation will eventually stop dead. But only because the bank will have created an artificial recession and crushed the lifeblood out of the economy.

There’s an added factor we need to take into account. Ordinary folk are unlikely to sit by idly while their standard of living is ravaged by inflation. If they are in a trade union, they will defend themselves by demanding compensating wage increases. That process is already under way. Scottish teachers have already submitted a pay claim for an extra 10%. Given that this is roughly the rate of inflation, this is merely a request to retain the purchasing power of their existing salaries. We have also seen railway workers ballot for a national pay strike. If this goes ahead next month, rail services will come to a juddering halt.

READ MORE: Scottish Tories lash out at Nicola Sturgeon after National essay on indyref2 urgency

I predict that pay confrontations will come to dominate politics not just at Westminster but also at Holyrood. This is virtually guaranteed since ScotRail was nationalised earlier this year – which leaves the SNP government playing on a very sticky political wicket, assuming it is serious about holding a second independence referendum next year. For 2023 is likely to be the year of maximum confrontation with the unions over defending living standards and pay.

So far, the First Minister seems set to play hardball with the unions. EIS, the largest teaching union, has already rejected a 2% pay offer, which is totally understandable with inflation running at five times that figure. The RMT union is considering major disruptions to the Edinburgh Festival after being offered a miserly 2.2%. I should point out that teachers and trades unionists were major backers of a Yes vote in 2014.

If the First Minister wants to build support for both a second referendum and a subsequent, resounding Yes vote, then she cannot side with the Treasury and the Bank of England over wages. Scottish politicians should back workers trying to defend their incomes, even if it means defying Treasury spending rules. Local authorities should borrow to pay protective wage increases and the Scottish Government should guarantee those loans. Independence would free Scotland from a recession imposed by the Bank of England, allowing Scotland to meet energy shortages by expanding local production.

There is an alternative to stagflation, the combination of recession and higher prices. It is called Scottish independence – and now.