Back in January, Rishi Sunak presumably thought it was a smart way to try to project an air of confidence and stability from Downing Street after the Liz Truss wildness. Promise something that, according to the collective wisdom of financial markets, was about 95% likely to happen anyway. Thus the first of the prime minister’s five new year pledges to the British people was this: “We will halve inflation this year to ease the cost of living and give people financial security.”
Never mind the fact that the Bank of England – not the government – sets interest rates to tackle inflation. Sunak’s calculation, one assumes, was that an easy win was on the cards and he could scoop the credit by being the person who had set the target.
Less than six months later, the safe bet looks substantially less safe. Inflation was 8.7% in April, confounding the Bank’s forecast that a faster fall would materialise as we passed the anniversary of higher energy costs. The City consensus for May’s reading, which will come next week, is about 8.5%. Andrew Bailey, the governor, has conceded that inflation is “taking a lot longer” than hoped to come down. An embarrassed Threadneedle Street is reviewing why its models have proved so wonky.
The gilts market has taken a look at this mess and understandably decided that interest rates will be higher for longer because inflation in the UK is stickier than elsewhere. A halving of inflation this year is still possible but nobody appears to have a handle on the interplay between wage increases, a tight labour market, the second-round effects of energy costs and, possibly, corporate pricing power.
In any case, a halving from what to what? When Sunak made his promise on 4 January, the latest published reading was the November 2022 inflation figure of 10.7%. The number for December was 10.5% and January 2023’s turned out to be 10.1%. Which one did the prime minister mean to be used? Or perhaps he was referencing a quarterly rate, rather than a monthly one, which would have some logic. Or perhaps the vagueness was deliberately cunning.
Whatever the truth, the odd half-percentage point may matter to the final reckoning of the “promise”. The National Institute of Economic and Social Research (NIESR) last month forecast that year-end inflation will be 5.4%.
The blurry nature of the pledge is one reason why Sunak should never have made it. The main reason, of course, is that the government should not be seen to compromise the operational independence of the Bank in any way. Parliament sets the target for inflation - 2% – and the Bank’s monetary policy committee is accountable for delivering it. That’s how the system works. The script is not meant to involve the prime minister confusing things by airing additional targets.
Mervyn King, a former governor of the Bank of England, suggested in an interview with LBC this week that Sunak’s inflation promise was “not wise”. You bet. It was foolish and improper.
Jagjit Chadha, the director of NIESR, went further last month and argued it was “a complete mistake” to set a target. “The government should not be stepping into that space. In my own view, it has provided a focal point for 5% inflation this year, and contributed to the persistence [of high inflation], by making people plan around that halving,” he said.
In the circumstances, Sunak is in no position to grumble if the promise returns to bite him – and if consumers, mortgage borrowers and businesses vent their anger in his direction. The prime minister set a target that was not in his power to deliver, and he ignored political convention to do so. The numbers may yet align for him as more rate hikes arrive, but the little political stunt will still have been seriously ill-advised.
