Leading article: Don't forget the jobless in the battle against inflation

The monster of rising unemployment was first unleashed on Britain more than two years ago. And despite the fact that the recession nominally ended in 2009, the beast of joblessness remains at large, inflicting severe damage on hundreds of thousands of lives.

In the final three months of 2010, the number of unemployed rose by 44,000 to 2.5 million. The primary victims have been the young. Some 965,000 16- to 24-year-olds are now out of work. The number of people in long-term unemployment, having been out of work for more than a year, also rose by 17,000 to 833,000. And these figures do not show the full extent of the damage done to the jobs market by the bust of 2008. Some 1.19 million are now working part time because they cannot find full-time employment.

The Work and Pensions minister, Chris Grayling, tried to look on the bright side yesterday, arguing that unemployment is "stabilising". This is a very optimistic interpretation of the figures. And even if true, it offers little comfort. If unemployment stopped rising tomorrow, the misery of those at present out of work would continue.

Strong economic growth (2 per cent of GDP a year at least) is needed to bring down unemployment. Such an expansion is also needed to counteract the impact of the public sector job cuts that are coming this year as a result of the Coalition's spending cuts. Yet we seem to be getting the opposite at the moment. In the final quarter of 2010, the economy contracted.

The Governor of the Bank of England, Mervyn King, yesterday stated his belief that Britain will avoid a double-dip recession. But the Bank also lowered its estimate for 2011 and 2012 growth. That is not good news for the unemployed. Lower growth means fewer new jobs will be generated.

The Governor also strongly hinted that the Bank's Monetary Policy Committee is likely to begin raising policy interest rates this year to cope with 4 per cent inflation. The clamour is certainly growing for the Bank to raise rates, particularly from the right of the Conservative Party.

Inflation is a real cause for concern because it squeezes living standards. It is very hard on those who live off the interest on their savings. But the fact is that the spikes in prices are a result of tax changes (in particular successive hikes in VAT) and higher global commodity prices. There is no sign that high-inflation expectations are becoming embedded or that, outside the banking sector, workers are demanding large pay increases to compensate. Moreover, there is still a great deal of unused capacity in our economy, which is likely to act as a brake on domestic, if not imported, prices for some time.

The danger of raising interest rates at this stage of the economic cycle is that it could cut the legs from under the recovery (if indeed that is still the appropriate description of our economic circumstances). If businesses see their borrowing costs rise – which would be a consequence of a rise in the Bank of England policy rate – they could decide to halt investments. If homeowners see their mortgage costs rise – another inevitable consequence of a rate rise – they could curtail spending, undermining the retail sector. Inflation would fall, but at the price of creating a weaker economy. A weaker economy would be highly unlikely to create the number of private sector jobs necessary to reduce unemployment.

Inflation is a serious economic problem. But high unemployment is more serious still. Some have chosen to focus on the former, but play down the latter. The stewards of our economy need to be mindful of the pain inflicted by both.