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A good election to lose

Central to the art of political promise-making is being certain that failure will occur on someone else’s watch.  Under no circumstances should a politician make a pledge which will have to be honoured within the same electoral cycle – and especially if failure is likely to occur just prior to a general election.  It is with this in mind that we need to consider Prime Minister Rishi Sunak’s inflation pledge in January:

“We will halve inflation this year to ease the cost of living and give people financial security.”

At the time this promise was made, UK inflation was running at 10.6 percent.  And so, by December 2023, official inflation will have to have fallen to 5.3 percent if Sunak’s promise is to be honoured.  Even the establishment media though, are beginning to raise doubts, following yesterday’s unexpectedly high headline inflation figure of 6.7 percent – unchanged from September.  As Szu Ping Chan at the Tory-leaning Telegraph explains:

“A shock pause in inflation’s downward march has cast fresh doubt over Rishi Sunak’s pledge to halve inflation by the end of the year…  To achieve his inflation goal, the rate of price rises must slow to 5.3pc by the end of the year…

“When Sunak initially made his promise in January, it was seen as the easiest of his five priorities. Inflation was expected to fall rapidly in 2023.  However, a slower-than-expected decline this spring quickly cast doubt over the pledge.”

The Telegraph, along with much of the establishment media latched onto what can only be described as misinformation from the Office for National Statistics press office, which mendaciously included rising fuel prices as one of the reasons for the stubbornly “sticky” inflation rate.  While it is true that oil prices – followed by prices at the pump – have risen sharply since the summer, the inflation rate is measured year-to-year, and 12 months ago, the Brent oil price was a little higher than today:

In fact, diesel prices fell by 13 percent, and petrol by seven percent in the year to September, so that fuel prices were holding inflation down… although the gap will close if prices continue to rise.  In any case, fuel prices do not carry a large weighting within the inflation calculation – which is based upon the proportion of an average household’s spending on various items.  A far bigger concern is with housing costs – rents and mortgages – which account for 22.5 per cent of the weighting in the inflation calculation.

This is terrible news for Rishi Sunak, as it guarantees that – barring fiddling the figures – not only is his pledge going to fail, but it is very likely that the official inflation rate in December is going to be higher.  This will happen for two reasons.  The first, and more technical issue is that the weightings are going to be revised.  And since housing costs have been eating a growing proportion of people’s incomes, the weighting will have to rise.  The second reason though, amounts to little more than tragicomedy: the measure which the Bank of England has been using to try to get inflation to fall is about to drive it into the stratosphere.

Let’s begin with rents, where the impact of rising interest rates was felt sooner.  Buy-to-let landlords were particularly badly hit and have had more trouble rolling over their mortgage deals.  This has already resulted in a high level of defaults.  But less obviously, landlords have been selling up while there is still time ahead of an expected decline in house prices.  For tenants, the result has been fewer rental properties on the market, and higher rents on those properties which are available.  This, of course, is only the start, since bigger shocks await landlords who face 50 to 100 percent increases on their monthly payments between now and next spring.

The problems facing tenants pale in comparison to what is beginning to unfold for millions of people buying houses on a mortgage.  Of the 1.4 million mortgage deals which are ending in 2023 and 2024, the majority will be ending between now and Christmas.  And while this may not immediately show up as mortgage defaults or repossessions, the increased monthly costs – more than £900 extra on an average house – will have to be incorporated into the household costs within the inflation calculation.

No doubt both the government and the Bank of England will engage in smoke and mirrors politics to claim that the interest rate part of the inflation calculation should be ignored.  But the fact remains that the inflation rate that Rishi Sunak promised would be 5.3 percent in time for Christmas looks set to be above seven percent – far more than any of the other G7 states.  Moreover, the debt-default crisis which will inevitably follow calls into question two of Sunak’s other pledges:

“We will grow the economy, creating better-paid jobs and opportunity right across the country.

“We will make sure our national debt is falling so that we can secure the future of public services.”

Even before the coming mortgage default shock, official growth – which now includes the overseas activities of UK registered companies – was back at pre-pandemic levels of less than one percent.  Unemployment, under-employment and insolvencies continue to rise.  And government itself is struggling to keep the national debt under control as investors demand higher interest rates.  Moreover, with a largely unnoticed local government debt time-bomb waiting to detonate, far from securing the future of public services, the government is more likely to have to preside over their abolition… not something that they want to do just months before an election…  Unless, that is, they’ve decided that this is a good election to lose.

As you made it to the end…

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