Inflation has returned to single figures for the first time since August last year, according to the latest data from the Office for National Statistics. The consumer prices index (CPI) rose by 8.7 per cent in the year to April.
Jeremy Hunt said this shows “we’ve acted decisively to tackle inflation”, but prices across the economy are still rising far more quickly than wages, and they are not doing so in the even manner suggested by the headline CPI rate. The annual rate of inflation on food is still 19.1 per cent, down just 0.1 per cent from last month. In some shops – such as Lidl, where the same goods cost 24.9 per cent more than they did last year – prices are growing more than four times as fast as wages (which are up 5.8 per cent in a year).
To be absolutely clear, falling inflation does not mean prices are falling, but that they are rising slightly less quickly. For goods and services to become more affordable, inflation would have to fall below wage growth for a sustained period. This is unlikely to happen because unemployment is rising, and falling headline inflation could give employers more of an excuse to reduce or reject workers’ pay rises. At 8.7 per cent, inflation is still more than four times the Bank of England’s target. Workers across the economy are still becoming poorer at a very concerning rate.
Why inflation has fallen
Rishi Sunak promised at the start of the year to “halve inflation” and the latest headline inflation figure takes him some way towards that target. However, the main reason it’s lower is mathematical: CPI is a measure of how much prices have grown in the last year, and the biggest single element in recent price rises – the 54 per cent hike in everyone’s energy bill that occurred when Ofgem raised the price cap in April 2022 – is now more than a year in the past. The Prime Minister’s contribution to the fall in inflation has been to experience time passing, and then take credit for it.
This underscores just how mediocre the promise to halve inflation was in the first place: it was an offer of an economy in which the purchasing power of your income dwindles rapidly, but your impoverishment is slightly less aggressive than it was under the previous administration.
Why core inflation is more important
The headline figure also conceals a more disturbing trend. The prices of some goods and services, such as energy and food, can rise and fall rapidly, distorting the headline number, so “core” inflation – price rises in the less volatile parts of the index – is seen as a more stable representation of the overall temperature of the economy. Core inflation has not peaked: it rose from 6.2 per cent to 6.8 per cent in April, the highest level since March 1992.
A stubborn rate of core inflation may mean that the Bank of England is forced to raise interest rates still further, putting more pressure on low-income families who increasingly use debt to buy essentials, and homeowners who are remortgaging at much higher rates. Financial markets expect rates to peak at 4.75 per cent, which would mean they are likely to rise once more this year.
Why wages can’t compete with inflation
As wages rise in response to higher prices and interest rates, fiscal policies (the economic decisions taken by Hunt and Sunak) do make a difference, because it is the Chancellor and Prime Minister who set the thresholds at which people begin to pay different levels of tax. Because Hunt and Sunak decided to freeze these thresholds, rising wages will push millions of people into higher tax brackets.
This is handy for government finances – the Institute for Fiscal Studies has described the freeze as “the single biggest tax-raising measure since the 1970s” – but for swathes of middle earners such as nurses and teachers, it means their income is squeezed by a marginal tax rate (the extra tax paid for an extra pound earned) that can exceed 60 per cent as the thresholds wipe out reliefs such as child benefit – leaving precious little extra to compete with the racing prices in supermarkets.