Two years after inflation peaked at 9.6 per cent in October 2022, prices are once more accelerating. Inflation rose to 2.3 per cent in October, as measured by the Consumer Price Index, which means prices are once again rising in the economy faster than we’d like. The 0.6-percentage-point rise is higher than forecast, and it’s more bad news for the government.
Energy prices are partly to blame: the energy price cap set by Ofgem rose by £149 for a typical household at the beginning of October, and prices are still well above 2022 levels (before Russia’s invasion of Ukraine). Poor harvests – one of the factors that brought thousands of angry farmers to Whitehall yesterday – have also contributed to a small but deeply unwelcome rise in food prices.
Prices in some areas, such as recreation and culture, are falling slightly (by 0.1 per cent in the past year), but this has been outweighed by the cost of housing and household services, which are now rising at an annual rate of 5.5 per cent. These do not appear to be blips. Long-term inflationary pressures are likely to continue; the brief honeymoon below the Bank of England’s 2 per cent target is over.
This will mean more pressure across the economy through higher mortgage rates and borrowing costs for businesses. The government’s already thin margin for error just got thinner: last month’s Office for Budget Responsibility forecast marked the Budget on the assumption that CPI would be 1.4 per cent this quarter and 1.1 per cent in the first quarter of next year. Those figures represent wiggle room that has just disappeared.
This also puts every government decision into a less flattering light. Businesses are already blaming Budget measures for increasing pressure on prices: supermarkets warned earlier this week that the increase to employers’ National Insurance contributions will lead to this. The British Chambers of Commerce has said this morning that businesses are “deeply concerned about rising costs on the horizon next year. The combined impact of national insurance and living wage rises, and the Employment Rights Bill is likely to put strong pressure on labour costs.”
Policies such as the cut to winter fuel payment now look less excusable to voters coping with higher energy bills. It’s unfortunate that the figures have been released during the year’s first cold snap. At the same time, policies that were well received by Labour’s allies, such as pay deals for public-sector workers, now look less generous. Unions that have so far enjoyed a bit of beer-and-sandwiches treatment from the government will likely find those conversations more difficult, which means the risk of industrial action has just increased too.
Diplomacy and trade negotiations will also take on a new dimension in a higher-inflation environment: tariffs are a more potent weapon against an economy already coping with price rises.
Inflation was arguably the root cause of the last government’s demise: without the huge borrowing made necessary by the 2022 spike in energy prices, Liz Truss’s mini-Budget would probably not have caused the gilt market reaction that allowed her to set a record for brevity in power. In the US the Biden administration, despite having handled the US economy very well, has just been unseated by Americans’ loss of purchasing power (among other things).
Once again, the numbers have shifted unpleasantly under Labour’s plans. It is likely that more compromises will need to be made, and more interest groups will find themselves coping with unpopular decisions.
This piece first appeared in the Morning Call newsletter; receive it every morning by subscribing on Substack here.
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