If Prime Minister Rishi Sunak thought inflation would drop away quickly this year, delivering an easy victory in the build-up to the election expected in 2024, Wednesday’s data was a rude awakening.
(Bloomberg) — If Prime Minister Rishi Sunak thought inflation would drop away quickly this year, delivering an easy victory in the build-up to the election expected in 2024, Wednesday’s data was a rude awakening.
Office for National Statistics inflation figures have defied forecasts for three months running, proving stickier each time and extending further into everyday items like groceries and mobile phone bills. Inflation isn’t just a persistent problem, it’s becoming a “politically toxic” one, said Helen Thomas, chief executive officer of economics consulting firm BlondeMoney and former adviser to ex-Chancellor of the Exchequer George Osborne.
“When it comes to the ballot box, voters will make their unhappiness known,” Thomas said. “It feels like there’ll have to be some sort of response.”
While the Consumer Prices Index fell to 8.7% and is no longer rising by double digits, the UK remains the undisputed inflation capital of the developed world — both on the headline rate and the all-important “core” measure that indicates the potency of underlying pressures.
Managing inflation is technically the Bank of England’s job, but Sunak’s pledge in January to cut it in half this year “puts the prime minister’s signature on it quite literally,” said George Dibb, head of the Centre for Economic Justice at the Institute for Public Policy Research.
For Sunak and his Chancellor Jeremy Hunt, there’s nowhere to hide. As the International Monetary Fund made clear in its UK health check released Tuesday, it’s no longer plausible to blame Russia’s war in Ukraine or snarled-up supply chains for increases. Energy and grain prices are falling. The energy regulator Ofgem is expected to announce Thursday that annual household bills will fall by about one-fifth to £2,000 from July, automatically shaving roughly a percentage point off inflation.
Instead, Britain’s inflation problem is increasingly domestic, in wages and services — everything from the cost of a pint in pubs to mobile phone bills and used cars.
Pressed in Parliament about the figures on Wednesday, Sunak acknowledged that food price increases were “too high,” before arguing the UK was suffering similar problems to places like Germany and Sweden. “We should not be complacent because there is more work to do,” he said.
The government is taking some action. Hunt called a meeting of food manufacturers this week to ask “industry to work with us as we halve inflation, to help ease the pressure on household budgets.” Sunak this month promised to provide an extra 10,000 temporary visas for agricultural workers next year to ease wage pressures. The Competition and Markets Authority is probing the fuel and grocery sectors to see if there is any price-gouging that it can stamp out.
Yet the cost-of-living crisis shows little sign of letting up, with grocery prices jumping 19% and mobile phone bills climbing 7.9%. Social campaigners are renewing their calls for government support, noting such increases hit the poor hardest.
“Almost nine in 10 families on Universal Credit cannot afford basic items like food and clothing,” the Joseph Rowntree Foundation said. “The government must ensure that benefits always cover the cost of essentials.”
Leaving the job entirely to the BOE seems increasingly implausible. Although the central bank has pledged to do what it takes to bring down inflation, the medicine is as politically unpalatable as the disease.
The BOE has already raised rates from 0.1% in December 2021 to 4.5%, sending mortgage costs surging. Investors expect a whole percentage point more, which would put rates into territory the BOE has previously warned will lead to debt distress. The average annual mortgage payment is already expected to increase by around £2,400 ($2,970) this year.
Rents in England are climbing at the steepest pace since records began in 2006 as buy-to-let landlords — many of whom are on interest-only deals — pass on their costs or sell up and get out.
Still, BOE Governor Andrew Bailey has pledged to stay the course. “Our job is stopping imported inflation spreading into persistent domestic inflation,” he told a Wall Street Journal event on Wednesday.
The longer inflation remains elevated, the more pressure the government will come under to intervene, Dibb warned. It has the tools, as demonstrated last year with the energy price guarantee — a form of price control that automatically lowered inflation.
Dealing with the problem at source would potentially take the pressure off the BOE and spare households even more punitive borrowing costs. Politically, the government will be aware that the longer the cost-of-living crisis lasts, the worse its chances of an election victory. A poll last month by Opinium found that cost-of-living concerns are stengthening the opposition Labour party vote.
But intervention carries its own risks. The IMF pilloried the UK last year for using energy subsidies to help households, which it argued made the BOE’s job harder. The policy cost government more than £40 billion last year and expanded the deficit, another problem Sunak has pledged to fix.
The opposition Labour Party is making full political use of the situation by drawing attention to the rising cost of mortgages. Higher borrowing costs have been associated with the Tory party since former premier Liz Truss’s mini-budget caused market rates to spike last October, making it fertile political ground.
“This cost of living crisis isn’t improving in this country compared to others as well as it could. The remedy on the monetary side of more rate hikes is going to be painful,” Thomas said. “Every time we get an inflation print, it’s making things more politically uncomfortable, both for the Bank of England and government. It’s quite a nasty, toxic combination.”
–With assistance from Andrew Atkinson.
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