While inflation figures usually generate a news story in their own right, last month’s figures led to the biggest news line of them all. Rishi Sunak’s surprise announcement that he would hold a snap election on 4 July came hours after April’s inflation figures were announced. They were widely reported to have heavily influenced his decision to take the country to the polls. On Wednesday, there was more good news for the government as UK inflation fell to 2% in May, returning to the official target rate for the first time in nearly three years. The inflation figures were the one of the last significant economic indicators due for release before voting day. But inflation alone – although important – is not the only measure that economists look at. So with James Carville’s immortal 1992 soundbite (“The economy, stupid”) still echoing in our ears, we give you the latest in our data series on how 14 years of Conservative party rule has changed Britain – this time on the economy.
Prices are still rising
If one phrase sums up how Britain suffered in the years after the Covid pandemic, it is “cost of living crisis”. A combination of the pandemic and the war in Ukraine sent prices soaring, most notably for food, energy and heating.
Inflation peaked in October 2022 at 11.1%. It has fallen ever since, with a few bumps in the road, helping Rishi Sunak meet his pledge to halve inflation during 2023. Yet food prices remain 20% above the level seen in July 2021 and family budgets remain stretched. By way of demonstration, let’s look at the cost of a family staple: spaghetti bolognese, using the prices of individual items as per the ONS basket of goods. Using this measure, we can compare what it would have cost to make a spaghetti bolognese for a family of four six years ago: £8.44 in May 2018. Food prices peaked later than general inflation. In June of last year, the ingredients which make up a spag bol hit at £10.35 before falling back to £10.15 last month.
Interest rates could be coming down
Interest rates were high in the 1980s when the price of property was low. Rates fell in the 00s as home prices soared. Then came the 2008 financial crash and the cost of borrowing tumbled to almost zero. Rising inflation during 2021 triggered a round of interest rate increases to 5.25%. Now we have the worst of all worlds – high interest rates and stratospheric house prices.
After the latest fall in inflation, the betting is that Bank of England officials may start to cut interest rates in September and possibly again in December to 4.75%. Other factors prompting action by the central bank are figures showing that the economy is growing slowly and that unemployment is rising – both legacies of Conservative governments that, over 14 years, favoured austerity over investment. Lower interest rates will give the economy a much-needed lift, but it’s not a done deal. There are risks from the global economy and from domestic price pressures. A widening of the Middle East conflict could send oil prices higher, while defeat for Ukraine could spark a return to higher food and energy bills.
Government borrowing remains high
Britain’s borrowing has declined sharply as a proportion of national income, or gross domestic product (GDP), from the first half of the last century, when it rocketed to pay for the costs of two world wars. In the 1990s, then chancellor Gordon Brown ran surplus budgets – which meant the government spent less than it received in tax – and reduced the overall level of debt to less than 50% of GDP. It rebounded after the 2008 financial crash to more than 100% and is now 97%, according to the latest official figures. Successive Conservative-led governments failed to bring down the ratio to anywhere near the pre-crash levels.
Economists are divided about how much borrowing is too much. Labour is concerned about criticism that it will be profligate in government and has pledged to maintain a Tory budget rule that forces the chancellor to cut the debt-to-GDP ratio in the final year of a five-year forecast. France has a debt-to-GDP ratio of 114% and, without spending cuts of €10bn, is heading for 117%. Credit ratings agencies, which monitor debt levels, have judged that 117% would be too high and downgraded France, in effect warning investors that it is more likely the country could default on debt payments. Not long after the latest downgrade, Emmanuel Macron called a snap election in France.
Are recessions a thing of the past?
When an economy contracts for two consecutive quarters, it is considered to be in recession. Some economists take a stricter view. The National Institute of Economic and Social Research says there needs to be a contraction over a full year, which rules out the downturn in 2023, when the economy contracted between June and December, but grew slightly over the entire year. There was a huge contraction in the Covid-affected spring of 2020, but the economic shutdown was on the government’s orders and there were lots of subsidies around to help businesses and households. The government also softened the blow to incomes during the 2009 recession. So it is not since the 1990 contraction that people have been left to survive without much state intervention. Then, tens of thousands lost their homes and many businesses went bust.
Recessions are always not far away. They tend to arrive when businesses have run out of road after borrowing heavily to grow. They cannot keep repeating the same trick, especially when interest rates climb higher. But many other factors can intervene, too. The last 14 years have shown that shocks can come from left field and the government needs to be better prepared than it was in 2020. There is a group of economists who believe recessions relate to overblown property prices and arrive in 18-year cycles. They have been right about at least the last two. If we discount the 2023 and 2020 contractions as pandemic-induced, the next biggie will arrive in 2026.
Food bank reliance has soared
Crucially, while prices shot up, wages remained stagnant, leading to record numbers of people relying on food banks. The Trussell Trust, which is the UK’s largest food bank charity, has seen its business grow rapidly. From the number of food banks to the number of emergency parcels, they provide a sad record of the UK’s growing number of impoverished households. Many of the people who visit food banks are in work, but their low wages cannot stretch to cover bills. Not only have consumer prices risen, but so have taxes, rent and mortgages.
Council tax has been on a rollercoaster ride since 2010. First it was frozen, then from 2016 increased by 5% a year, before a social care surcharge in 2020 limited the increase to 3% (in total, bills still increased by 5%). Across all taxes, the overall level is heading to its highest since the second world war under current government plans. Mortgage and rent bills have also soared. The latest official figures show that rent inflation is at a record level, while those who need to remortgage can face a doubling or trebling of their monthly interest payments. Figures from the homelessness charity Crisis show that the number of people sleeping rough is now 61% higher than it was 10 years ago and 120% higher than when data collection began in 2010.