For the past year people across the UK have been struggling with the worst cost of living crisis for decades.
Inflation rocketed to record levels throughout 2022, as the war in Ukraine pushed up the price of everyday necessities, including food, energy and fuel. At the same time, wages have failed to keep pace with this seismic change in everyday costs.
As we moved into the latter part of the year, interest rates soared in response to the political turmoil originating from Liz Truss’s short time as Prime Minister. This applied a further squeeze to millions of mortgage payers and home buyers across the UK.
In a bid to kickstart his premiership and begin to rebuild the Conservative Party’s self-ascribed reputation for ‘sound money’, Rishi Sunak gave a speech on 4 January. One of the PM’s key pledges was to halve inflation this year.
But is this target achievable - and if inflation comes down, does it mean the cost of living crisis will ease?
What is the current UK inflation rate?
Inflation is an economics term for how much the price of goods and services has risen over a set period of time. Another way of thinking about it is that it shows how much consumer spending power has decreased.
As of April 2023, the latest month for which we have data, the Office for National Statistics’ key inflation yardstick - the Consumer Prices Index (CPI) - showed prices were an average of 8.7% higher than they were in the same month a year previously. This figure marks a significant drop on March’s 10.1% figure (which was also the figure when Sunak made his speech in January) and last October’s record rate of 11.1%.
What did Rishi Sunak say about inflation?
In a speech on 4 January, Rishi Sunak outlined his ambitions and policy priorities for the year ahead. One of his key pledges focused on inflation, which he said he would halve in 2023.
He said achieving this goal would reduce the burden of the cost of living crisis and “give people financial security”. He also urged the public to “judge [the government] on the effort we put in and the results we achieve”. However, Sunak did not outline how he planned to reduce the rate of inflation. Indeed, the speech gave very little detail on how the government would achieve any of the goals the PM set out.
Can Rishi Sunak reduce inflation?
When he made the speech, several experts had already pointed out that inflation was likely to fall anyway over the course of 2023.
In its November 2022 Monetary Policy Committee report, the Bank of England predicted that inflation would decrease below 10% after March 2023 (it stayed at 10.1%) before dropping below 2% by the first half of 2024. It said it expected inflation to be between 5% and 6% by the end of the year. Its forecast has become slightly more pessimistic about inflation since then given inflation has proven to be more embedded in the economy than first thought.
One of the UK central bank’s key jobs is to keep inflation at or near 2% - a rate deemed to be high enough to encourage a level of spending that (in theory) encourages a healthy rate of economic growth. It controls the rate of inflation by adjusting interest rates - something it did earlier in May.
It does independently of the government, but with reference to government fiscal policy as well as the wider UK economic picture. Basically, it will be the Bank of England rather than Rishi Sunak that will be doing most of the leg work in bringing inflation down over the next year.
Meanwhile, progressive think tank the Resolution Foundation projected in December that global trends would also help to push inflation down. In a report it published in December, it said price rises in the UK will slow as a result of falling demand for US goods (which influences the world’s economy given the dollar is the main international reserve currency), the easing of Covid-related supply chain bottlenecks, and a drop in energy prices as Europe continues to wean itself off Russian oil and gas.
So, while the UK government has been very keen to blame international pressures for the scale of the cost of living crisis, Rishi Sunak is clearly not prepared to give these same issues the credit they deserve for easing inflation.
The second thing to point out is that falling inflation does not mean falling prices. Nor does it necessarily mean the cost of living crisis will ease, as Sunak suggested in his speech.
Professor David McMillan, a finance expert from the University of Stirling, told NationalWorld that this is because of how inflation is calculated.
“Inflation is measured as the change in prices between two points. There are various reasons why inflation increased through 2022, but the dominant one is the war in Ukraine,” he said. “[It] led to increases in oil and gas prices, among others. This then fed through into a whole range of other prices as they are basic commodities used throughout the economy.
“That same percentage change will not happen between 2022 and 2023 (indeed current gas prices are at the lower end of 2022 prices). As such, the rate of inflation will come down given its method of calculation. Prices will still be higher (inflation would have to be negative for prices to fall) but the rate at which they are rising is less - that is, unless another large shock happens, such as the escalation of the war.”
Professor McMillan added that the “nature” of the UK cost of living crisis will also contribute to a fall in the rate of inflation, as “people have less money to spend”. In this vein, Rishi Sunak has already contributed to a short-to-medium term fall in inflation by getting his Chancellor, Jeremy Hunt, to hike taxes in the Autumn Statement.
With all of these things in mind, Professor McMillan said we should therefore view Rishi Sunak’s pledge to halve inflation as being both “misleading” and “politically expedient” given the PM will barely have to lift a finger to achieve his aims.
Rishi Sunak inflation pledge update
As 2023 has gone on, Rishi Sunak’s inflation target has looked more and more precarious.
Inflation actually increased to 10.4% in February before not falling by as much as expected in March (to 10.1%) and then failing to tumble by as much as hoped once again in April (to 8.7%). The worrying aspect of April’s figure was that core inflation - a measure that excludes volatile categories, like food and energy prices - actually went up. It climbed to 6.8%, its highest level in more than 31 years.
Earlier in May, independent think tank the National Institute of Economic and Social Research (NIESR) said it expected inflation to fall to 5.4% by the end of 2023. Given inflation was 10.5% when Rishi Sunak pledged to halve inflation in January, this outcome would mean he would miss his target.
At its last interest rates decision in May, the Bank of England said it now expected inflation to be around 5.2% by the end of 2023 - a figure that gives Sunak a chance of achieving his goal. But given the bank has so far overestimated how much inflation will fall by on three occasions this year, its predictions may not fill the PM with confidence.