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Rishi Sunak is confident he will achieve his primary ambition for the year. The Institute for Fiscal Studies is not so sure. In the US, Joe Biden already has. The matter in question is whether the UK prime minister can halve inflation in 2023.
When Sunak first made the pledge in January, it appeared no more challenging than forecasting a reduction in water levels from high tide. The fact that there is now some doubt over whether consumer price growth will halve from 10.7 per cent in the fourth quarter of 2022 shows inflation’s damaging persistence. And from a political standpoint, there is strong evidence from the US that the public will not give Sunak and his chancellor Jeremy Hunt credit even if they succeed.
An opinion poll last week showed 74 per cent of US-registered voters thought that inflation had gone in the wrong direction over the past year. They were objectively wrong, of course, because the annual rate of US price growth had dropped from 8.4 per cent in July 2022 to 3.3 per cent a year later. But the public mood in this instance gets closer to the truth than the economic statistic.
Inflation is conventionally measured over a 12-month period, but take a longer view and the public complaint becomes immediately apparent. Over the past two years, prices have risen more than 12 per cent in the US and over 17 per cent in the UK. Regardless of who was to blame for the cost shock, neither figure remotely reflects price stability.
Economists and politicians who concentrate excessively on the annual inflation rate mistake a specific economic statistic for what really matters to people — not having to worry about prices.
Worse from a political standpoint is the evidence suggesting that a large minority of the public confuse the inflation rate (the rise in prices) with the price level. So when politicians or central bankers celebrate falling inflation, this group feels lied to because prices have not come down. This further corrodes public trust.
Johnny Runge of King’s College London, who studies the public understanding of economics, told me that falling inflation was a particularly difficult idea to communicate. It might be good news, he said, but “the public are very unlikely to notice”.
Even if wage levels catch up with prices, as they have in the US and are beginning to in Britain, problems do not disappear. Pay growth is taxed and in the UK, the marginal direct tax rate is 32 per cent for someone on average earnings. That means a rise in gross pay at the latest headline rate of 8.5 per cent will result in take-home income growth barely above the 6.8 per cent inflation rate.
These real-world implications of economic statistics speak to the corrosive nature of inflation — the hassle it brings. When price stability is lost, people have to fight harder for pay rises, consider switching jobs and change consumption habits as some goods and services become unaffordable.
Economics generally assumes these adjustments to be low cost and almost automatic. But each decision leaves a sour taste and forces people to have an abnormal focus on what things cost. It is not surprising they are irritated.
You might then ask why Ronald Reagan and Margaret Thatcher gained popularity when inflation fell in the mid-1980s. That is most likely because they were in power when the prospect of ending a long period of persistently high inflation came into view. Whether it is fair or not, today’s politicians will be blamed for destroying the subsequent long period of relative price stability.
So it is not difficult to understand why the public is unimpressed by falling inflation to date and is likely to remain so. Sunak and Hunt would be well advised to keep the Union Jack bunting packed away in its Downing Street box. Lower inflation is not going to rescue the Tories’ economic reputation.