Sunak may struggle to translate key victory on inflation into votes

Article content

(Bloomberg) — Of the five goals Rishi Sunak set for himself in early 2023, he achieved only one: halving inflation by the end of last year. On Wednesday, he may go further and declare victory on the cost of living, with consumer price growth expected to fall close to the 2% target and reach the lowest level since July 2021.

A bigger challenge will be convincing voters he deserves credit for a new positive figure from the Office for National Statistics. Sunak is likely to use the inflation data – which is expected to fall to 2.1% according to a Bloomberg survey of economists – to claim Britain is ‘turning a corner’, with the economy pulling out of recession faster than expected and living standards rise again. the attendance.

Article content

Article content

Nineteen months ago, inflation was at a 41-year high of 11.1%, and Britain suffered the worst price shock of any major advanced economy. The fall since then is the fastest since the 1970s and raises the prospect of a 5.25% rate cut as soon as next month, reducing costs for both mortgage holders and businesses.

With the governing Conservatives some 20 points behind Labor in the opinion polls and the party still reeling from defeat in the recent local elections, Sunak and Chancellor of the Exchequer Jeremy Hunt are banking on a feel-good factor ‘ as they prepare for a general election. elections expected to take place later this year.

“We are winning the battle against inflation,” Hunt said at a campaign-style event in Westminster on Friday. “By working with the Bank of England, we have achieved the soft landing that many thought impossible.”

Yet a painful legacy remains. While Sunak and Hunt point to recent flows – slowing inflation, rising real wages – Labor focuses on levels. Real wages remain lower than before the financial crisis, meaning that wage packages still buy less than in 2007.

Article content

Article content

Similarly, inflation may be about to return to target, but the price level is 23% above its starting point in 2019, when the current parliamentary term began. Food prices have risen by about 30% in three years since the start of 2021. Before that, it took thirteen years for an equivalent increase to occur, according to calculations by the London School of Economics.

GDP is also boosted by a rising population. Production per head paints a less flattering picture. The historic seven-quarter decline ended with a rebound early this year. But GDP per capita was still 0.7% weaker than a year earlier.

As for tax cuts, the story is the same. Hunt has deducted 4 percentage points from national insurance, a payroll tax, since November. But the £20 billion ($25.4 billion) giveaway is overshadowed by frozen thresholds, which mean the overall tax burden will continue to rise. Households will be better off this year, but worse off afterward.

On Friday, Hunt acknowledged that living standards have fallen “over the course of this parliament”.

Voters have increasingly favored Labor to run the economy after former Prime Minister Liz Truss’s disastrous ‘mini-budget’, which upended a traditional dynamic in British politics. A YouGov poll published earlier this month found that 27% of the public think a Labor government would protect the economy, ahead of the 20% who trust the Tories. Labour’s lead is even greater when it comes to the management of public services

Article content

Another reason Sunak and Hunt are struggling to claim credit for lower inflation is because the job ultimately falls to the BOE. “If inflation reaches 2.1% or lower, this will provide the cover the Monetary Policy Committee needs to start cutting rates in June,” said Thomas Pugh, economist at RSM UK.

Hunt and Sunak are right to say the economic climate is improving. Real wages are now rising at the fastest pace since September 2015, excluding disruptions caused by furlough payments during the pandemic. Economic output has recovered sharply from the mild technical recession in 2023 and has reached a new high.

Energy bills fell 12% last month to their lowest level in two years, with a further 7% cut from July. Food inflation has also fallen sharply. That will take some pressure off lower-income households, which bore the brunt of the price shock. The BOE predicts that living standards, as measured by real after-tax household income, will improve faster this year than the annual average of the decade before the pandemic.

Investors and economists estimate the chance that the BOE will cut rates in June at about 50%. But the MPC remains concerned about underlying price pressures, especially in the services sector, where inflation is expected to remain well above 5% in April. That is more than double the forecast 2.1% for CPI inflation as a whole.

Article content

Many household bills are linked to past inflation data, such as mobile phone contracts, and were topped up in April. In addition, the 10% increase in the minimum wage in April may have affected prices in pubs, restaurants and shops. Deutsche Bank AG estimates that 15% of services inflation will be reset as a result of the first factor.

After next week, there is still inflationary pressure before the bank’s interest rate decision on June 20. Next month’s wages data could still benefit a rate cut, as it is not clear how a nearly 10% increase in the minimum wage has affected salaries overall. .

“The most important thing is what happens with inflation in the services sector,” said James Smith, developed markets economist at ING. “April is just this very volatile month, just because there are so many different areas that are resetting their prices and obviously wage growth has been quite high.”

After falling to around 1.9% in the second quarter, consumer price growth will rise again to 2.2% by the end of the year, according to Bloomberg’s survey of economists. Yet neither the BOE nor the Bloomberg survey expect inflation to rise again to 3%. With inflation close to target, economists expect the BOE to cut rates to 4.5% by the end of 2024.

There is relief that the economy is returning to normal for the first time since before the pandemic, according to a government official. Covid and the inflation shock are in the rearview mirror. The question is whether the recent improvements in the short term are more important to the electorate than the decline in the longer term.

—With help from Harumi Ichikura.

Article content