“The plan is working,” is how Rishi Sunak greeted Wednesday’s news of a fall in the rate of inflation. “If we stick to the plan I’ve set out, we’ll get it done.”
Up to a point, prime minister. Mr Sunak’s “plan” is really nothing of the sort. It is an aspiration to halve the rate by which prices are rising rather than, as is commonly assumed, for prices to fall. And he wants to do this without a hand raised by any of his ministers. It is not the business secretary, Kemi Badenoch, who controls oil and gas prices, but traders in commodity markets – and rather than watching Whitehall, they have their eyes peeled for moves by Vladimir Putin or Opec. It is not Jeremy Hunt at the Treasury who sets interest rates, but Andrew Bailey and his colleagues at the Bank of England. And the people of Threadneedle Street may be alarmed by core inflation, which strips out volatile items such as food and fuel, remaining stubbornly high. With only four months before his self-imposed deadline, this looks like one life goal the man in No 10 will miss.
Before then, expect more economic pain. The Bank looks likely to raise rates again next month, and beyond that financial markets expect even more increases. Given the data showing the jobs market cooling down and production starting to drop, the economy seems to be slowing. Good luck to any minister fighting an election against that backdrop.
Famously, Mr Sunak has a background in economics and finance, and possesses a keen sense of logic. In which case he should be able to spot the economic silliness of what he is trying to do. Relying on one tool – the key interest rate – which is in the hands of an institution celebrating 25 years of operational independence is no way to bring down inflation in a hurry. Monetary policy works with “long and variable lags” on the economy, as Milton Friedman observed. And in the UK, most of the pain from rates will be concentrated on that minority of the population paying down mortgages. Meanwhile, the evidence grows that the greatest inflationary pressure comes from those at the top of society. Last month, the Institute for Fiscal Studies revealed that it was City workers and those in the energy sector who were taking the outsize pay rises, while those outside London in manufacturing, hospitality and education are seeing their incomes shrink.
While “greedflation” is a word that attracts controversy, there is clear evidence that some corporations are using this burst of inflation to boost their profit margins. Again, that will feed into rising prices much more quickly than a pay demand by refuse collectors of some local authority. So why should ordinary households be made poorer when a few groups operating at the top of the economy are driving so much of the price pressure?
The obvious solution to this would be for the Bank to ease off on interest rate rises and for the government to tax high earners. It is usually said of taxes on the rich that they don’t raise much money, but the objective here would be to dampen inflationary demand. The cash it would yield could go towards investing in green energy, so as to make the UK less reliant on rollercoaster fossil fuel prices. Higher taxes are unpopular – when they are on you. When they’re on someone else, on the other hand, they can be quite acceptable. If Mr Sunak is appalled by the idea of taxing his former workmates in the City, perhaps one of his opponents might take it up. Did someone mention the shadow chancellor, Rachel Reeves?
