‘Rishi Sunak Claimed Inflation is Back to Normal and Brighter Days are Ahead – he’s Completely Wrong About Both’

UK inflation has dropped to its lowest level for three years to 2.3%, within spitting distance of the Bank of England’s official target of 2%. The government have not been slow to take credit, with Rishi Sunak claiming that inflation is “back to normal”, that the “plan is working” and “brighter days are ahead”. Not a single part of his ebullient statement is correct.

The fall in inflation has little to nothing to do with what his government has done, plan or otherwise. Since the Bank of England was made independent in 1997, it, and not the government, has responsibility for managing inflation, which it attempts to do primarily via changing interest rates. 

But, the drop, has nothing much to do with the Bank of England either. Inflation surged over the last few years as a result of some very big, global events that disrupted supplies across the world. Covid lockdowns disrupted supply chains, pushing prices up for some critical goods. Russia’s invasion of Ukraine resulted in massive disruption to energy supplies, particularly in Europe, but fertiliser and some grain supplies were also affected. And harvests for foods like cocoa, olive oil and now potatoes have been battered 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 disrupts weather across the globe.

Changing interest rates in London won’t stop Vladimir Putin invading Ukraine. They won’t make more olives or tomatoes grow in Morocco. They can’t stop torrential rain deluging potato crops in Holland. Interest rate rises may even make inflation worse: there’s a growing argument amongst economists that when so many people don’t pay a mortgage – one-third of UK households are now outright owners – and so many have significant savings, interest rate rises actually hand them more money, potentially adding to inflation.

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And, by putting up interest rates today, you make investment for tomorrow more expensive. Major wind farm projects have been cancelled on the back of interest rate rises, threatening future energy supplies – and risking future energy price shocks.

Those huge, global events over the last two years are now washing out of the inflation figures. It’s mathematics, not smart economic policy, that is doing the work for Sunak’s government – since inflation is measured as the rate of price increase since a year ago, it takes a while for sudden surges in prices to wash out of the numbers. That is the major driver of falling inflation, in the UK and across the developed world.

“Back to Normal” – the new Normal, More Instability

And, we aren’t going “back to normal” – if “normal” means a more-or-less stable inflation rate around 2%, much as we had back in the 2000s. Put the combination of geopolitical instability and climate and nature crises together, and you’re looking at a world where supply shocks of the kind we’ve seen in the last few years are more and more likely. Houthi militias are still restricting shipping through the Suez Canal. Oil prices have surged since Hamas’ attacks on October 7 last year. The World Bank has warned, in its latest Commodity Markets Outlook, that geopolitical tensions had the potential to disrupt supplies and prices over the rest of this year.

And climate change isn’t going away – our best forecasts have the situation worsening over the rest of this decade and beyond, as average temperatures rise and extreme weather events become more frequent. A study of 121 countries, over 25 years, in the scientific journal Nature earlier this year suggested rising temperatures were going to lead directly to higher prices. Put all this together, and our best guess for future inflation should be that it is likely to be both higher and more unstable, as the world is becoming increasingly unstable. Even the Bank of England’s own forecasts show inflation rising again by the end of this year.

“Brighter Days are Ahead’ – no They’re not!

‘Brighter days” are also not on the horizon. A lower rate of inflation does not mean prices are, on average, falling. It means they are, on average, rising more slowly. Those huge price rises of the last few years are a permanent loss in living standards. Energy prices remain 50% higher than they were in 2021, despite falling recently. Food prices have risen 50% more than prices in general. Unless people’s incomes rise sharply to compensate for these new, higher prices, people will be worse off in real terms. This hasn’t happened for those in work – wages and salaries today are 2.3% lower than in early 2021, before big price surges.

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And there are further surges down the line. While the energy price cap, which regulates prices for household energy, is likely to come down at the end of the week, the privatised water companies are lobbying hard for household water bill increaaes between 24% and a shocking 91%. With Britain dependent for 80% of its food on imports, including both what we buy directly and the fertilisers we need, disruption to agriculture across the rest of the world turn into rising prices and even shortages in this country. 

As if to demonstrate the point, on the same day the government was talking up its non-existent inflation “success”, it launched its domestic emergency preparedness plan, suggesting households stock up on essential supplies like “tinned food, batteries and bottled water”. There’s nothing like a home stockpile of tinned food to really scream “brighter days ahead”.

Some, as we’ve seen, do very well out of shortages, cornering the market and creaming off fat profits from high prices: energy company profits have been notorious over the last few years, but the four biggest global agribusinesess have been making more money than ever before. 

Dealing with a more unstable world, where climate change impacts are beginning to creep into our daily lives, and geopolitical tensions rise, will require more than fiddling with interest rates and feel-good statements from Downing Street. We will need, in the short term, to be prepared for government to apply the brakes on price rises for essentials, whether household energy or basic food items – halting price rises when they become excessive after shocks.

Windfall taxes on excess profits, not only in the energy sector, would make sense. Inflation-busting pay rises, to protect households, are still essential, but in the longer term, instability demands investment in making our food, energy and water systems more resilient, driving out the profiteering, and securing essential supplies.