‘Prices, what prices?’ could cause Sunak and Johnson even more harm than ‘crisis, what crisis?’
Almost 30 years ago, Tory Chancellor Norman Lamont appeared on the night of “Black Wednesday” as a panicked and broken man in front of the Treasury. The UK exited the European Exchange Rate Mechanism (ERM) after an extraordinary day on which it had hiked interest rates from 10 percent to 15 percent.
In the shade, away from the bright TV lights, lurked a young David Cameron, Lamont’s special adviser at the time. The trauma of seeing the Tories’ reputation for business ruined in real time has burned into Cameron’s memory. No wonder, as the chaos has been ruthlessly exploited by Labor, and many in both parties believe that it paved the way for Tony Blair’s landslide a few years later.
Rishi Sunak was just 12 years old that night, but he is well aware of the political damage that can result from interest rate hikes and the rising inflation that they often cause. In fact, it was the Tories’ botched attempt to suppress inflation that led to the 1992 disaster by trying to use the ERM to peg Britain to German interest rates, just as we would after one in a classic British recession Boom.
Since New Labor’s own trauma in the 2008-09 global financial crisis, Britain and other countries have seen not only record-breaking low interest rates, but also low inflation. But the specter of rising prices has long since returned: The International Monetary Fund (IMF) warned this week that the UK and the US must be particularly “vigilant” against inflation.
Nevertheless, the IMF agrees with many economists that the energy price spikes and supply chain problems expected this winter will calm down by the middle of next year. The Bank of England (given the power of setting interest rates by Gordon Brown to reassure the markets that Labor can trust the economy) has tried to calm a nervous city by saying it expected the rate to rise Inflation from currently 3.2 percent to 4 percent, but will fall again by spring.
But the markets don’t seem to believe that. Financiers share graphs that show a renewed rise in 10-year interest rates, and there is talk of 6 percent inflation next year. While some scoffed at previous “screeching wolf” inflation panics over the past year, some in the Bank’s Monetary Policy Committee (MPC) have made more aggressive noises in recent days.
While many expected interest rates to rise slightly in February and then April, there is now talk of a rise in December (fueled by MPC member Michael Saunders). The bank’s new chief economist Huw Pill said last week the risk balance is shifting towards “major concerns about the inflation outlook”.
And while Boris Johnson welcomes some rising wages, it is Sunak who is concerned about rising inflationary pressures. A major concern within the Treasury Department is that global trade bottlenecks could last longer than many think, especially as the heavily vaccinated Western public is boosting demand at a time when supply in less vaccinated lockdown-affected countries is in Asia and the rest of the world is declining.
Sunak and the bank are well aware that while the type of rate hike in the UK would historically be tiny (even a gradual increase to 0.75 percent is nothing like the old days), more than a fifth of UK homeowners on the go Variable mortgages are gone. Any surge could hit millions of people, from ordinary workers to over-indebted landlords, whose collapse could create much bigger problems. Red Wall voters, Blue Wall voters, middle-aged and elderly voters wondering when their mortgage ends would all be affected.
The key will be not only market volatility, but household inflation expectations as well, and right now the statistics are not a pretty sight. This week’s Institute of Fiscal Studies and Citibank Green Budget showed that one-year inflation expectations in the UK and US have risen sharply recently, which in turn could lead to a self-sustaining wage, price and rate hike spiral. Another hike in the energy price cap in April, as well as an increase in local taxes and the NI hike, will add to the tribulation.
We are nowhere near 1992, but Sunak knows better than most that there is a very good reason why chancellors rarely finish in 10th place. In both Treasury and Threadneedle Street, September CPI inflation figures due in a few days will brood even more fearfully than usual.
Most nerve-wracking for Sunak is that some of the decisions (like interest rates) are out of his hands. He knows that if the bank raises interest rates too early or too long, the fragile hopes for a sustainable economic recovery could be stifled. It’s hard to “build better” when you have to pay more for longer.
Labor insiders tell me that the most poisonous charge against the Tories to come back from focus groups is the “One law for them, one for us” line. Ordinary households spend a much larger proportion of their disposable income on food, energy and housing than wealthy ones.
The prime minister was unfazed by the impact of the £ 20 a week loss of universal loans from millions of family funds, but he would have a hard time shaking off the rising cost of basic services on top of the bottlenecks on store shelves. “Prices, what prices?” would be more damaging than “crisis, which crisis?”
And the real effects are already beginning. Monthly grocery bills are up nearly £ 6 from last year, it was reported this week. If the public begins to believe that inflation is here in the medium term, the “cost of living crisis” could become an ongoing economic and political problem that makes the recent gas station panic look like a picnic.