Rishi Sunak is boasting about his “achievement” in halving inflation. Like the fly on the ox’s neck congratulating itself on a hard day’s ploughing, neither he, nor his government, nor even the Bank of England and its interest rate rises, deserve the credit for falling inflation, which is driven by falling global energy prices.
When Russia invaded Ukraine in February 2022, the disruption to oil and natural gas supplies across Europe was immediate, with prices for natural gas surging to 10 times their pre-invasion level. Inflation, which measures average price rises over the previous 12 months, soared to 40-year highs in Britain and for other heavy users of natural gas such as Germany. But as the initial shock wore off and energy prices started to come down from the middle of last year, overall inflation everywhere has started to fall.
The price of gas in Qatar or Norway is not affected by the rate of interest in London. The policy that most affected UK inflation, instead, was the energy price guarantee, which capped the price faced by households for their energy use. The Office for Budget Responsibility thinks the energy price guarantee cut inflation, at its peak, by 2.5 percentage points. But the guarantee was introduced by the much-maligned Liz Truss and Kwasi Kwarteng – Sunak and his chancellor, Jeremy Hunt, have steadily reduced its level of support as global energy prices have fallen.
Politically, Sunak will be hoping for a repeat of the good fortune that struck David Cameron and his chancellor, George Osborne, in late 2014. Fearing the rise of US shale production, OPEC, urged on by Saudi Arabia, decided against production cuts in November that year, aiming to flood the global market for oil, depress its price and subsequently crush heavily indebted US shale producers as their output became unprofitable.
This didn’t work as intended: shale production in the US, after a brief dip, has grown rapidly, turning the US into a net fossil fuel exporter by the end of 2019. But at the time the global price of oil still fell very rapidly, dragging other prices down with it. UK inflation fell for months, briefly turning negative (meaning prices falling overall) in April 2015. The real value of wages and salaries, which take account of price changes and had declined consistently since Cameron became prime minister, now finally started to pick up a little.
This sudden good fortune had nothing to do with Cameron’s government, but was still a political disaster for Labour. It killed the party’s well-used attack line on the “Tory cost of living crisis” and allowed the Conservatives to claim their vicious austerity spending cuts were working – handily in time for the May 2015 election, which Cameron won by a slender majority.
A lower headline rate of inflation today is unlikely to have the same impact. The rate is still high, compared with recent decades, at more than double the Bank of England’s official target. Real wages and salaries are barely rising, and are still lower than they were two years ago. Interest rate rises have yet to hit borrowers fully, with 2.4m fixed-rate deals still to expire between now and the end of 2024. And food prices, which people tend to notice very quickly, are still very high, up about 10% over the last year. Just as Joe Biden is seeing in the US, improving headline economic statistics can still mean people feel worse off because, in reality, they are. Sunak’s meretricious bragging can’t hide real economic failure.
James Meadway is the host of the Macrodose podcast
