Sunday, May 14, 2023
Halving inflation isn't going to transform Tory fortunes
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt. Not to be reproduced without permission.

This is a difficult time for Rishi Sunak, the chancellor turned prime minister. After the Tory drubbing in the local elections, opinion polls taken since have snuffed out for now the idea of a “Rishi revival”, which some commentators were talking enthusiastically about a few weeks ago.

Sunak is a pragmatic prime minister, lurching to the right to side with an unpopular home secretary on what is likely to be a vain attempt to stop the migrant boats, while also infuriating some Tory Brexiteers with a sane and sensible plan to scale back the repeal of EU laws.

Stopping the boats, or at least passing laws to try to stop them, is one of his five pledges to turn things around. Another is to cut NHS waiting lists, though there is no promise to reduce overall lists to acceptable levels.

As befits a former chancellor, three of his pledges are economic. One, to “make sure our national debt is falling” should not detain us for too long. The debt rose by £193 billion to £2,247 billion in the fiscal year just ended, 2022-23, and from 97.3 to 99.6 per cent of gross domestic product. This measure has not yet peaked relative to GDP and the underlying measure, excluding the Bank of England, is not predicted to do so until 2026-27, well after the election. The main purpose of the pledge may be to fight a battle with Labour on fiscal responsibility but, even under Sunak, the Tories have a lot of ground to make up on that following the premierships of Boris Johnson and Liz Truss.

It is the other two economic pledges that matter. A lot of my economist friends get upset by the prime minister’s pledge to halve inflation this year, saying that this crosses a line over Bank of England independence, and that it not within the government’s gift to achieve it. Some would love to see the government with egg on its face on this.

The Bank, though, does not appear to have a problem with it and, as well as raising Bank rate from 4.25 to 4.5 per cent on Thursday, on a 7-2 vote as expected, predicted that whether the pledge will be met will be on a knife-edge. It forecasts 5.1 per cent inflation in the final quarter of this year. Others, including the National Institute for Economic and Social , think it will be higher, though not much, 5.4 per cent by the end of the year.

In the case of both forecasts, it might be necessary to get the calculators out. Inflation in January was 10.1 per cent, so 5.1 per cent is not quite half, though a more typical comparison would be the fourth quarter of last year when it averaged 10.7 per cent. And if falling inflation in coming months is accompanied by further interest rate hikes, as the Bank suggested might be the case, it will not be a cause for celebration.

That will be one of the issues when the inflation pledge is assessed by voters, but it may not be the main one. When many people hear a promise of halving inflation, they automatically think that means lower prices, not an easing of the pace of price rises. There is a big difference between the two; between levels and rates of change.

As it is, those levels have gone up a lot, and much of it occurred on Sunak’s watch, either as chancellor or prime minister. Since the December 2019 election, consumer prices have risen by 18.8 per cent, with huge increases in essentials, food and beverage prices up by 24.5 per cent, household energy bills by 34.5 per cent, and transport by 18.3 per cent. High food prices, a big concern for households, have also worried the Bank. A fall in inflation will not wipe out the overwhelming majority of those price rises. People will be squeezed by those high prices, and tut-tutting about them, for some time to come.

A related problem with the inflation pledge is that it is one thing to promise to fix a problem that you inherited from your political opponents - a tactic that worked for David Cameron and George Osborne in 2010, and more particularly in the 2015 election – and quite another to do so for a problem that emerged while you were in charge. Even a halving of inflation would leave it well above levels that people thought was the norm and, indeed, the official 2 per cent target,

There is also a difficulty with the other economic pledge, to “grow the economy, creating better-paid jobs and opportunity right across the country”, Growing the economy in a way that people notice requires a lot more than was revealed in Friday’s GDP figures, of which more below.

The UK has a problem of slow growth, which is reflected in stagnant or falling living standards. Avoiding recession in the face of Russia’s invasion of Ukraine is welcome but if the Bank’s upgraded growth forecast is anything like accurate, the economy will only just be on the right side of stagnation. It predicts 0.25 per cent growth this year, followed by 0.75 per cent for each of the following two years. This is feeble, particularly when combined with the Bank’s higher inflation forecast.

Regular pay in real terms is no higher than at the time of the last election and below where it was in the early part of 2008, 15 years ago, when the financial crisis was unfolding. Real household disposable incomes are suffering a record fall, and GDP per head, a measure of economic success, was 2.1 per cent lower in the first quarter than in the final quarter of 2019, when the last election was held.

There is a good chance that this parliament will break records on many of these measures, and not in a good way. The official forecast from the Office for Budget Responsibility (OBR) is that real household disposable incomes per head will still be slightly below their pre-pandemic level in late 2019 in 2026-27, well into the next parliament.

Not only that, but the idea of a spread of jobs and opportunity across the country is problematical. Levelling-up is widely seen to have stalled. Though job growth in the region has bene encouraging over the past year, the northeast still has the lowest employment rate and highest economic inactivity rates in England, closely followed by the West Midlands, another former industrial heartland.
It is good that Sunak has set out some pledges against which he can be judged.

Only the most optimistic of Tories would believe, however, that even if some of them are achieved, it will be a political game-changer.