There’s no way around it, six months of double-digit inflation and combined with the forecasted largest drop in real household disposable income since records began in 1956/7 over the next two years is about as depressing an economic background to daily life as you can hope for. So naturally, why wouldn’t the Prime Minister of this country want to make getting on top of it central to his administration? That’s exactly what Rishi Sunak did back in January, when he set out his five pledges for the year, with a commitment to halving inflation top of the list.
At the time, that promise seemed like a no brainer. Falling fuel prices and orthodox thinking about the way inflationary cycles work led to forecasts from the Bank of England and OBR that inflation had peaked and would start to rapidly fall. All the Government had to do was let the market take its course and reap all the benefits at the end of the year. However, while there’s a lot of time left in the year for inflation still to fall, the months since January have not gone quite as planned. An initial dip in the rate of CPI inflation was followed by another increase in February and this week the Office of National Statistics announced another modest fall from 10.4% down to 10.1% in March.
This is undoubtedly a big problem for the Government. In January, the OBR was expecting CPI would have fallen to 9% but food prices have continued to rise, keeping the overall rate stubbornly high. There’s still hope for a big drop next month as Ukraine war-linked energy price rises from 12 months ago become baked-in, but if there’s anything the last year’s taught us, it’s that the global energy market is inherently unpredictable at the moment and there’s no guarantee prices will continue to fall. Finally, there’s the ongoing impact of the labour market, particularly in the private sector where the facing pressure to raise wages and attract workers is still keeping the economy on the edge of a wage-price spiral.
What then can Sunak do to ensure he keeps his commitment of halving inflation? Well, he could continue to do nothing, and if inflation stays high simply admit defeat and say we tried our best but those pesky ‘global factors’ got in our way again. This would of course be hugely damaging to the PM’s track record for quiet competence on the economy that he’s fought hard for since he entered No. 10. The problem is there aren’t many alternatives. Ultimately the Government has limited influence over inflation rates. The main, albeit blunt, tools sit with the Bank of England and its independent control of interest rates. If the BoE does as expected raise interest rates again, it’s unlikely to make the public happy as unfixed mortgages rise and new mortgages get more expensive.
The government does have responsibility for most public sector pay and public spending. In both cases it faces an uphill battle to hold the line on sub-inflationary increases, meaning the PM is stuck between a rock and a hard place: does he change his position to give away money to try and curry favour on issues such as the NHS, at the risk of driving new inflation? Or does he stick to his guns and say government spending has to stay under control for the good of the long term, facing a further wave of strikes in the meantime?
So, the Government faces a long and nervy remainder of the year at the mercy of external forces to either prove or disprove that it can keep its central economic promise. Not an ideal position to be in but a classic lesson that in politics you should never make commitments that aren’t in your gift to give.