UK inflation could be found to have fallen below 5% for the first time in two years when figures for October are published this week. It would be a landmark moment for Rishi Sunak, who in 2022 promised to halve inflation from its 10.7% level.
The prime minister made inflation one of the five pledges by which the nation should judge his premiership. And a drop to less than 5% in the consumer prices index could well be one of the few pledges he can comfortably say has verifiably been achieved.
Inflation peaked at above 11% last year, before slowly inching downwards, in response at first to the fall in oil prices, then to the pressure brought to bear by the Bank of England, with its 14 consecutive increases in interest rates.
It was running at an average of 10.7% in the last three months of 2022, and it was this figure Sunak chose to be judged by when he said he would halve inflation.
If forecasts are proved correct – economists polled by Reuters are predicting a fall in annual inflation to 4.8% in October, from 6.7% in September – Sunak will be able to boast of his achievement with three months to spare.
And when Jeremy Hunt stands up in the Commons on 22 November to deliver his autumn statement, he too will want to trumpet the government’s success.
The chancellor won’t have much good news to dispense, so he is expected to dedicate a considerable amount of time in his speech to the victory over “the scourge of inflation” and its positive impact on households.
Hunt’s contribution to the hitting of the target consists mostly of government inactivity, rather than any judicious spending or structural reforms. Unlike last year, when the Treasury injected billions of pounds into the economy to subsidise energy bills, this year Hunt has raised taxes and restricted spending, thus limiting the government’s contribution to inflationary consumption.
Hunt’s parsimony means councils are going bust for lack of funds and debts are piling up in health trust balance sheets. His longer-term decisions have been more about cancelling infrastructure projects – HS2 being the most obvious example – than starting new ones.
The latest downward shift in inflation follows the reduction in the energy price cap, which has smoothed the rise and fall in gas and electricity prices over the past two years. This time last year, the cap increased dramatically. A cut in the cap last month, lowering monthly bills, will affect the latest prices figures and be the main component of the year-on-year fall.
Shadow chancellor Rachel Reeves is focusing more on the broader state of the economy, which Sunak and Hunt also pledged to revive.
Official figures out on Friday showed the economy flatlining in the third quarter after a modest 0.2% increase in the second quarter. Over the past year, the economy has expanded by 0.6%, though economist Douglas McWilliams pointed out that a rise in the population over the past 12 months means this translates into an annual gain of just 0.1% a head.
Opinion is divided over what will happen next with inflation. The Bank of England’s monetary policy committee said in its latest three-year forecast that prices growth would slow towards its 2% target between now and the end of 2025. It kept interest rates on hold this month at 5.25%.
In the meantime the economy will stagnate and, as the latest GDP figures show, business investment will probably decline, goods exporters to the EU will continue to struggle and the long-term outlook for UK plc will be increasingly dismal.
Simon French, chief economist at stockbroker Panmure Gordon, attempted to spread some pre-Christmas cheer with his interpretation of the GDP figures and this week’s probable fall in inflation.
He said: “The other way to look at this data is that the UK economy has so far shown remarkable resilience to a huge rise in the cost of credit, the cost of staples and geopolitical cross-currents.”
France, Germany, Italy and Spain are also stuck in the same post-pandemic low-growth trap, he says, which makes it “far from clear that the UK is an outlier”.
Politicians on all sides appear to be hoping that central banks will manage to engineer a return to the good old days of low inflation and constant growth. Judging by the Bank of England’s forecasts, this objective is several years away. It also depends on a bet that the conflicts in the Middle East and between Ukraine and Russia will ease – a very risky wager.
