‘Rishi Sunak claims inflation is back to normal and brighter days lie ahead – he’s dead wrong on both

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Inflation in Britain has fallen to a three-year low of 2.3%, within striking distance of the Bank of England’s official target of 2%. The government has not been slow to take credit, with Rishi Sunak claiming that inflation is “back to normal”, that the “plan is working” and that there are “brighter days ahead”. Not a single part of his exuberant statement is correct.

The decline in inflation has little to nothing to do with what his government has done, planned or otherwise. Since the Bank of England became independent in 1997, it, rather than the government, has had the responsibility for controlling inflation, which it tries to do mainly through changing interest rates.

Rishi Sunak claimed the fall in inflation as he announced the date for the next general election. Photo: Imageplotter / Alamy

But the decline does not have much to do with the Bank of England either. Inflation has soared in recent years due to a number of very large global events that disrupted inventories around the world. Covid lockdowns disrupted supply chains, causing prices for some crucial goods to rise. The Russian invasion of Ukraine resulted in a massive disruption of energy supplies, especially in Europe, but the supply of fertilizer and certain grains was also affected. And crops for foods like cocoa, olive oil and now potatoes have been ravaged by extreme weather, linked to both climate change and the side effects of El Nino, the multi-year warm water cycle in the Pacific Ocean that is disrupting weather around the world. .

Changing interest rates in London won’t stop Vladimir Putin from invading Ukraine. They will no longer grow olives or tomatoes in Morocco. They cannot stop the torrential rains that flood the potato harvest in the Netherlands. Rate rises could actually make inflation worse: there is a growing argument among economists that when so many people default on their mortgages – a third of British households now own outright – and so many have significant savings, interest rates will actually rise. They get more money, potentially contributing to inflation.

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And by raising interest rates today, you make investments for tomorrow more expensive. Major wind farm projects have been canceled due to interest rate increases, jeopardizing future energy supplies – and risking future energy price shocks.

Those huge global events of the past two years are now washing out of the inflation figures. It is the math, not smart economic policy, that is doing the work for Sunak’s government. Since inflation is measured as the rate of price increases since a year ago, it takes a while for sudden price increases to disappear from the numbers. That is the main cause of falling inflation, in Britain and in the developed world.


“Back to Normal” – the new Normal, more instability

And we are not going “back to normal” – if “normal” means more or less stable inflation around 2%, just like we had in the 2000s. Put together the combination of geopolitical instability and climate and nature crises and you’re looking at a world in which supply shocks of the kind we’ve seen in recent years become increasingly likely. Houthi militias continue to restrict shipping through the Suez Canal. Oil prices have soared since the Hamas attacks on October 7 last year. The World Bank has warned in its latest Commodity Markets Outlook that geopolitical tensions have the potential to disrupt supply and prices for the remainder of this year.

And climate change isn’t going away; according to our best forecasts, the situation will worsen for the rest of this decade and beyond, as average temperatures rise and extreme weather events become more common. A study of 121 countries, over 25 years, in the scientific journal Nature Earlier this year it was suggested that rising temperatures would directly lead to higher prices. All things considered, our best guess for future inflation should be that it is likely to be both higher and more unstable as the world becomes increasingly unstable. Even the Bank of England’s own forecasts show that inflation will rise again at the end of this year.


“Better days are ahead” – no, it isn’t!

“Brighter days” aren’t on the horizon either. Lower inflation does not mean that prices will fall on average. It means that on average they rise more slowly. These enormous price increases in recent years mean a permanent loss of living standards. Energy prices remain 50% higher than in 2021, despite a recent decline. Food prices have risen 50% more than prices in general. Unless people’s incomes rise sharply to offset these new, higher prices, people will be worse off in real terms. This has not happened for workers: wages and salaries today are 2.3% lower than at the beginning of 2021, before major price increases.

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And there are more increases in the line. While the energy price cap, which regulates household energy prices, is likely to fall by the end of the week, privatized water companies are lobbying hard to see household water bills rise between 24% and a shocking 91%. With Britain dependent on imports for 80% of its food, both what we buy directly and the fertilizers we need, disruption to agriculture in the rest of the world is leading to rising prices and even shortages in this country.

To demonstrate this point, on the same day it addressed the non-existent ‘success’ on inflation, the government launched its domestic emergency preparedness plan, which suggested that households stock up on essential supplies such as ‘food in cans, batteries and bottled water’. . There’s nothing like a stash of canned food at home to really scream that “brighter days are ahead.”

Some, as we have seen, are doing very well because of the shortages, cornering the market and skimming fat profits from high prices: energy companies’ profits have been notorious in recent years, but the four largest global agricultural companies have more money than ever before.

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Coping with a more unstable world, where the effects of climate change are beginning to creep into our daily lives and geopolitical tensions are increasing, will require more than fiddling with interest rates and feel-good statements from Downing Street. In the short term, we will need to be prepared for the government to slow price increases for essentials, whether household energy or basic food – and to stop price increases when they become excessive following shocks.

Windfall taxes on excess profits, not just in the energy sector, would make sense. Anti-inflation wage increases are still essential to protect households, but in the longer term, instability requires investments in making our food, energy and water systems more resilient, eliminating profiteering and securing essential supplies.

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