IT is shaping up to be THE key battleground for the election.
Indeed, the news that inflation had fallen back to almost two per cent was the clinching factor in PM Rishi Sunak’s shock decision yesterday to go for a July 4 poll.
The PM – who entered No10 with the economy in turmoil after the chaotic 49-day Truss Premiership – can claim he has successfully restored calm, cut taxes and got GDP growing again.
Labour, meanwhile, will argue families are struggling to make ends meet – with the Tories to blame for much of the cost-of-living pain.
We look at the state we are in as the two sides prepare to go to the polls . . .
Q: Is inflation now under control?
A: The rate of consumer price increases has eased from 3.2 per cent in March to 2.3 per cent in April.
This is a huge drop from the punishing peak of 11.1 per cent in October 2022.
Inflation has fallen at the fastest rate in 45 years because energy costs are down by a fifth and food price rises are slowing.
The problem is that prices are still rising in pubs, restaurants and hotels, which is driving up so-called services inflation by 5.9 per cent.
This means inflation hasn’t fallen by quite as much as the 2.1 per cent figure economists were hoping for, which could have nudged the Bank of England to start to cut interest rates.
Q: Everything is still very expensive, are goods going to start getting cheaper?
A: The good news is some essentials are getting cheaper compared to last year.
For example, gas prices are down by 37.5 per cent, electricity costs are down by 21 per cent and butter and milk prices have dropped by ten per cent and seven per cent respectively.
However, most items are still more expensive than they were a year ago, and certainly since two years ago.
There are still some items, such as orange juice, chocolate and olive oil, which are surging in price, largely due to poor harvests.
Labour’s argument is that inflation falling just means price increases have slowed, which is why people are feeling no better off.
The Tories will counter that they have got inflation down much faster than economists were predicting.
Q: When will we start to have more money in our pockets, then?
A: Even Chancellor Jeremy Hunt admitted yesterday that “people don’t feel better off than a few years ago”.
However, this is largely because the economy has been faced with a series of massive shocks from the pandemic and Russia’s invasion of Ukraine, which triggered an energy crisis.
Arguably, we will only really feel better when our wages rise above inflation for a long, sustained period.
In positive news for the PM, the Resolution Foundation said this month that real wages, which factor in inflation, had grown at a healthy rate of two per cent in the 12 months to March 2024, the fastest since September 2021.
It confirmed real wages have grown almost as much in the past year as they have done over the previous 16 in total.
Q: What does all of this mean for interest rates?
A: High inflation is bad for our finances, not just because goods are more expensive but because of the link to interest rates, which set the price of mortgages and credit card interest payments.
The Bank of England hiked rates to a 15-year high of 5.25 per cent to bring down inflation.
It wants inflation to fall to two per cent before lowering them.
Because April’s inflation figure is still slightly higher than expected, and stubborn in the services sector, money markets have slashed their bets the Bank will cut rates in June.
Traders now reckon it will wait until August at the earliest.
Mortgages are priced off where markets expect future interest rates will be, so housing costs will remain a bit more expensive for a while longer.
This may be another reason the PM opted not to wait before calling the election.
If rates won’t come down significantly before autumn, why not roll the dice now?
Q: Is the recession now over?
A: Yes! Despite gloomy predictions from the Bank of England that the UK would be plunged into a deep, two-year recession, the economy has already bounced back after the mildest and shortest downturn in history.
Earlier this month, official figures showed the economy grew by 0.6 per cent between January and March, the fastest rate for two years.
The usually gloomy International Monetary Fund also admitted this week it was wrongly pessimistic because inflation has fallen so much faster than thought.
It now forecasts growth of 0.7 per cent this year, compared to its previous 0.5 per cent expectation.
Q: How are we doing compared to our rivals?
A: Our recovery from recession and sharp fall in inflation has meant forecasters at the International Monetary Fund now reckon the UK will grow faster than France, Germany, Italy and Japan over the next six years.
Q: When will my standard of living get back to where it was before Covid?
A: It is unlikely to go back to exactly where it was because there have been such major changes in the economy, housing costs and the way people work.
The good news is that if inflation keeps sliding, businesses should feel more confident to invest and hire, people will start spending and the economy will grow.
This means that even if prices are higher than what they were before the pandemic, higher wages should cushion that blow.
Q: If the economy is getting better, why hasn’t Rishi Sunak waited to call an election?
A: Number 10 strategists think the Prime Minister can say that his pledges on the economy, including boosting growth and halving inflation, have been fulfilled.
They think it is better to pull the trigger now on an election, set for July 4, rather than risk being buffeted by another unexpected shock.