UK inflation, interest rates, Tory impudence: Ian McConnell

This dollop was accompanied by an enormous ladleful of what many would surely consider to be utter condescension.

Prime Minister Rishi Sunak and Chancellor Jeremy Hunt appeared to be falling over themselves to give the impression that they really cared about ordinary people hammered by the hike in borrowing costs, with benchmark UK interest rates now more than 50-fold a record low of 0.1% which persisted until December 2021.

There was not, unsurprisingly but nevertheless irritatingly, any admission from the Tories about their own, very significant hand in fuelling inflation through their hard Brexit.

This effect has been highlighted by former Bank of England governor Mark Carney and by various pieces of authoritative research.

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The Centre for Economic Performance (CEP) at the London School of Economics and Political Science updated its analysis of the impact of Brexit on food prices in May.

The May paper from Jan David Bakker, Nikhil Datta, Richard Davies, and Josh De Lyon observed: “The cost of Brexit to each household now stands at £250 when only considering the impacts on food since December 2019. This aggregates up to £6.95 billion overall for UK households.”

These are big numbers.

Sterling weakness triggered by Brexit woe has meanwhile fuelled the price of imports generally.

The skills and labour shortages crisis, which has been exacerbated greatly by Brexit, has propelled wage inflation higher.

Some members of the Bank of England’s Monetary Policy Committee have looked nervous indeed about the knock-on impact of pay hikes on consumer prices. The current top brass at the Bank, including Governor Andrew Bailey, has been far less keen to acknowledge a Brexit effect in relation to pay rises, the UK’s labour market woes, and inflation more generally.

A video posted by Mr Sunak last week on Twitter had a real cloying feel about it.

It also had a bit of a tone of Play School’s “through the round window” segment, although without the objectivity and with less gravitas.

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He introduced his video segment with the following tweet: “I know a lot of people are worried about rising interest rates. But the alternative would make inflation far worse, so what you buy becomes more expensive & what you save, worth less. Take a moment to watch this video about why decisive action is needed to control inflation.”

In the video, Mr Sunak declared: “Inflation is the single biggest challenge our country and this Government faces at the moment. With high inflation, what you buy is more expensive, what you save is worth less, and in the end inflation puts your jobs and livelihoods at risk. And whilst inflation has fallen since I became prime minister, halving it remains my top priority this year.

“The independent Bank of England are controlling inflation by raising interest rates. We know this is causing borrowers distress and anxiety but the alternative is far worse. Without decisive action to control inflation, prices will stay high for longer and rates will be higher in the long run.”

The Prime Minister pledged in January that the Conservative Government would “halve inflation” this year, in his “building a better future” speech.

This speech came after official figures had shown annual UK consumer prices index inflation hit a 41-year high of 11.1% last October, before dipping to 10.7% the following month, still more than five times the 2% target set for the Bank of England by the Treasury.

Figures after Mr Sunak’s speech showed annual UK CPI inflation was 10.5% in December last year.

A few points are surely worth making in light of Mr Sunak’s latest musings on inflation last week.

He talks about inflation being his top priority.

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Mr Sunak also emphasises the Bank of England, which sets interest rates to control inflation, is independent.

Of course, it would be good to see the central bank assert its independence more often, for example in acknowledging the major effect of Brexit on inflation, as Mr Carney has. The Old Lady of Threadneedle Street seems out of kilter with expert opinion on this front, and closely aligned with the Government on some key opinions. That said, the Bank does have independence in setting interest rates under the current arrangements put in place after Labour came to power in 1997.

True, the Tories have been able to influence inflation in an upward direction with their hard Brexit. However, the ongoing reduction that was always inevitable because of base-year effects is absolutely nothing to do with them. Annual UK CPI inflation was 7.9% in June.

Furthermore, an inflation rate of 5% is not something that should lead to a hanging out of the bunting or smug grins from the Tories.

It is crucial that people recognise that the overall price rises which have already occurred are baked in. What we are talking about here is overall consumer prices rising at a slower pace, not falling. Mr Sunak’s warning that prices could “stay high for longer” is thus baffling. They are going to stay high in any case – unless there is deflation. The Bank of England is not forecasting deflation.

The Prime Minister, in true Tory style, declared last week: “I believe we cannot spend our way out of these challenges. The more we borrow now, the more we add pressure to the economy. And because we cannot borrow more money, I’m making some difficult but responsible choices about what we can spend money on.

“So look, I know a lot of people, particularly home owners, will be worried about rising interest rates but our best response is to keep working to reduce inflation. This Government has the right priorities and the right plan to halve inflation. We still have a lot of work to do but we are sticking to our plan because the plan is working.”

It is confusing. Mr Sunak is talking about the Government’s plan to halve inflation. But the Government does not control inflation in this way. And it is absolutely not clear what he means about the plan “working”. Unless he is talking about inflation falling because of base-year effects and other factors beyond the Tories’ control and his plan being that the Conservatives claim credit?

As the Bank of England raised UK base rates again on Thursday last week, and there is much room for debate over whether it might be overdoing things with its tightening of monetary policy, Chancellor Jeremy Hunt declared: “The Bank of England say today that, if we stick to the plan, we can get inflation right down to 3% by next year. It won’t be easy, but it’s vital we stick to that plan.”

There it is again – “plan”. Stick to what plan? Mr Hunt makes it sound like it is a Tory plan that the Bank of England is following. T

True, the Conservatives set an annual CPI inflation target of 2% for the central bank. However, Mr Hunt’s use of the word “plan” might suggest something meaningful in terms of Tory efforts in the context of an inflation fall. But how can that be? The Bank of England is, as Mr Sunak points out, “independent”.

It is, when all is said and done, difficult to escape the conclusion that the Tory plan when it comes to inflation is all about claiming credit for a reduction that is not only entirely unimpressive but also absolutely nothing to do with the Conservatives. That said, they have hoodwinked the electorate before.