8 June 2023

Inflation could be about to crater – and that spells opportunity for Sunak


For those who work in the real economy, some good news at last. The work-horse fuel upon which business and industry depends, diesel, has recently plunged in price and will likely bring inflation down with it. According to the RAC, the price of diesel is now down to 145.9p a litre.

There are many causes of this correction, including Russia cheating on its production agreement with OPEC and the Chinese economy recovering poorly from lockdowns. But it is illustrative of a wider trend. The world economy is slowing dramatically after interest rates rises by central banks and, consequently, prices are returning to more normal levels.

The money supply, which measures the money at work in the economy, is also shrinking in the US and Britain. But if you prefer a simpler measure, Tesco has announced price cuts on a basket of staples, as we Clubcard holders have been reminded. One suspects that the sort of people who are members of the Bank of England’s Monetary Policy Committee are not Tesco Clubcard holders.

That is the good news. Now for the bad.

The surge in inflation over the last 18 months and consequent moves by central banks have led to a worrying spike in mortgage rates. According to the ONS, some 1.4m households are due to re-mortgage this year, and they are coming off rates starting around 2% to go onto one starting north of 5%. This is going to be a serious shock to them and to the rest of the economy. Credit is tight. I am sure I am not the only homeowner peering nervously at mortgage rate tables. We moved to the country during lockdown and our new house, like so many rural houses, has been a bottomless pit of surprising bills and expenditure.

Inflation is too much money chasing too few goods and services, exacerbated by monetary accommodation. If only the Bank of England had moved faster when inflation started to take off, and if only we had a reasonable energy policy to ensure adequate cheap supplies, we would be in a more comfortable position. Critically, UK electricity remains among the most expensive in the world and, like diesel prices, this feeds into the price of almost everything.

We are often asked if there is any circumstance in which Labour could lose the next election. The answer is: we are about to find out.

It is a political cliché that in order to win an election a government must be able to answer in the affirmative Ronald Reagan’s question ‘Are you better off than you were four years ago?’. Actually, it is more subtle than that. An election winner must be able to answer positively that most people will likely be better off four years in the future, with the previous four years just being a critical piece of evidence in them making that judgement.

Given the mess the Conservatives have made, you would have thought this is a winning issue for Labour. But not so fast. The opposition has made the mistake of announcing detailed policies which a) don’t pass the common sense test b) have been criticised by their own side c) have been overtaken by events d) have scary implications for interest rates and taxes e) are the brainchild of shadow energy secretary Ed Miliband, who the electorate clearly said they did not want in 2015 and f) cumulatively amount to a lurch to the Left when taxes are already too high. What we need is practical moderation, not more ideology.

The signature policy of the Labour party is simultaneously to ban new North Sea oil and gas licenses while raising £19bn via increased, retrospective windfall taxes on the sector, to part fund a £28bn ‘green revolution’. The balance will be paid for by increased borrowing. They also say they will add 20% VAT to private school fees and abolish non-dom status. These will supposedly fund transformative investments in education and the NHS.

But an increased windfall tax will raise nothing like that amount as oil prices are below $80 a barrel. Furthermore, crushing what remains of the North Sea oil and gas sector can only lead to higher prices, both at the pump and to heat our homes – while also jeopardising tax revenues. New taxes on school fees and foreign investors and workers will also raise very little and could backfire. On top of all that, yet more Government borrowing can only push up interest rates further.

The question then becomes not ‘let’s kick the Tories out for making such a mess’ but ‘goodness, however bad things are now, they could actually be worse under Labour. I might even lose my house’. This could especially be the case if inflation craters in coming months, as I expect. Simon French of Panmure Gordon points out that moves in UK inflation are inherently lumpy due to the quarterly workings of the energy price cap, due to drop by 17% in July. This will be evidence of the case for Rishi Sunak.

The PM would be in a stronger position if he had an energy policy that made sense. Unfortunately, he has shown nothing like the pragmatism here as he has in other areas. The Government’s energy policy is a woeful, impractical mess. Just about the only good news is that Hinkley Point, the nuclear power station sensibly ordered by George Osborne, will hopefully be switched on in a few years’ time.

In fact, in general, Mr. Sunak doesn’t come across as tough enough. He should, for instance, block or delay the resignation honours lists of Boris Johnson and Liz Truss, which are wholly inappropriate as far as the rest of us are concerned. That is what Machiavelli would advise a virtuous and strong Prince to do.

So, ask yourself a question, under who would you be better off in four years’ time? It is not yet clear. But just as the German coalition government grinds to a halt over an impractical plan to phase out gas boilers, it is reasonable to expect that Hard Net Zero could blow up as a policy, sooner rather than later. It has all the hallmarks of a classic ideology inflicted on the commonality without sufficient thought or reasonableness.

Either way, inflation-watchers should keep an eye out for those special offers from Tesco.

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George Trefgarne is Chief Executive Officer and Founder at Boscobel & Partners.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.