Failure to control inflation leaves the Conservative Party staring into the electoral abyss
Source - Daily Telegraph - 21/06/23
It’s getting to the stage where you almost feel sorry for Rishi Sunak. Number 10 insists it is far too early to judge his premiership against the five pledges he made in January, and with very good reason.
The truth is, with a general election looming large in the rear-view mirror, it’s not looking at all good for this self-imposed yardstick.
In fact – if we are to measure the Government on the quintet of promises by which the Prime Minister wants his stewardship to be judged – then as things stand today, there is a strong case to say it is falling short on every count.
That’s how bad the current picture is, and just how much work ministers have to do to turn things around insofar as they are actually able to influence proceedings.
And it threatens to get so much worse as the battle to tame inflation panics the Bank of England into raising rates even higher and more quickly, compounding the mortgage squeeze and in turn triggering a full-blown housing crash. Comparisons with the 1980s and 1990s mortgage crises are not overblown.
No doubt when Sunak chose to essentially gamble his future, and indeed that of the entire Cabinet, on inflation halving by the end of the year, he thought he was being clever. With energy prices on a clear downward trajectory, it must have felt like a pretty safe bet. Indeed some people even accused him of being unambitious.
How he must regret that decision now. The latest inflation figures threaten to deal the decisive blow to what is left of this Government’s credibility and therefore its already-slim chances of being re-elected.
The Chancellor insists that May’s data from the Office for National Statistics “strengthens the case for the Government to stick to its guns”, which is worrying because it is now patently clear that nothing that anyone is doing is really working.
Indeed, if anything underlines both the dire state of affairs that the country finds itself in and the paucity of ambition to be found in Whitehall, it is calls for the Bank of England to push Britain into a recession from one of Jeremy Hunt’s advisers.
With a dangerous wage-price spiral emerging, JP Morgan’s Karen Ward, who sits on Hunt’s economic advisory council, says the Bank has to “create a recession”. This has been implied for some time, with the Chancellor recently insisting he would support “whatever it takes” to reduce the pace of price rises. But the cat is now well and truly out of the bag.
The Treasury would no doubt argue that the whole point of raising interest rates is to make us all poorer, but there’s a stark difference between taking some of the heat out of the economy and throwing it into the deep freeze by impoverishing a generation of homeowners – or worse leaving them without a home at all.
It is another reminder of how woefully the Bank has failed in its efforts to curb the menace of a 40-year high inflation rate, and it means another of Sunak’s key pledges – to grow the economy – may soon be dead and buried too.
Yet in tying its record so inextricably to inflation, the Government now finds itself having to accept blame for something that is primarily Threadneedle Street’s responsibility to tame. It is a huge own goal.
The latest figures are arguably the most concerning yet because they show that inflation has gone from coming down more slowly than anticipated to not coming down at all, having remained at 8.7pc, the same rate as in April.
More worrying still, core inflation – which strips out food, energy, alcohol and tobacco – is actually heading in the wrong direction. It jumped from 6.8pc to 7.1pc month-on-month. Not only is that higher than expected, it’s a 31-year high.
The spike in services inflation from 6.9pc to 7.4pc is perhaps the most alarming of all because as Grant Fitzner, chief economist at the ONS, points out, it is probably being driven at least partly by rising wages, which suggests inflation is becoming embedded in the system.
After 18 months of trying to dampen the inflation inferno, and 12 interest rate rises later, these numbers will come as a terrible shock to the Bank and the Government. It means further interest rate rises are a certainty but it also raises the likelihood of an acceleration in monetary tightening, as well as rates staying higher for even longer.
Many of those that were unfortunate enough to have experienced the mortgage crises of the 1980s and 1990s accuse younger homeowners of overreacting to the current situation – double-digit rates were commonplace back then, they are quick to point out.
But there is a reasonable case to be made that things are actually worse than they were back then because it’s affordability that really counts, not the actual rate they are paying. People are far more indebted now, and their incomes are lower now relative to monthly payments, research shows.
On that measure, today’s mortgage crunch could soon surpass that of the early 1990s, which was the precursor to the worst housing crash of modern times with 1 million homeowners plunged into negative equity.
The truly big fear is that having been too slow to respond to rising inflation, the Bank of England wildly over-compensates, hiking rates to levels that become completely unaffordable for millions before the effects of previous rises has had a chance to filter through the economy. That is why some experts have been calling for a pausel
Instead everything is pointing towards a scenario that every Conservative Government dreads – millions of middle-class families stuck in mortgage penury and a housing market teetering on the edge, as the country prepares to go to the polls. That could see the Tories ejected from office for a generation.
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