Is the Government Responsible for the Drop in Inflation?
Inflation in the UK has fallen to 4.6%, which is the lowest it has been in two years. Thanks, largely, to falling energy prices, a drop of 2.1% was seen since September. Now that one of Rishi Sunak’s five pledges has been met, can the government really take credit for getting levels of inflation down?
What Does a Drop in Inflation Mean?
In several interviews, Jeremy Hunt, Chancellor of the Exchequer, has purported the narrative that by cutting inflation, the government will be saving people money. In reality, this is not the case as prices have already gone up, but they’re then not rising as fast as they once were. This means that households are still worse off.
Since the energy price cap for the rest of 2023 was announced, inflation has fallen, and this has been one of the biggest influencers for price rises. As inflation is now below 5%, prices will still continue to rise, but not as quickly as they have been. Most goods and services will not be cheaper, and households will still continue to struggle, thanks to the ongoing cost of living crisis.
According to James Smith, Research Director at the Resolution Foundation think tank, energy rose by 49% and food by 28% over the last two years, which far outweighs the 14% increase in earnings over the same period.
How Inflation Fell
In January, when Rishi Sunak was outlining his main priorities, he mentioned how he wanted to halve inflation by the end of the year. Even before this announcement, economists were already forecasting that this would happen regardless, including Bank of England staff.
When Rishi Sunak was chancellor in 2022, he attributed the rise in inflation to external global factors. This meant that no internal influence would bring inflation down. This is one of the sole reasons why the Bank of England exists, in order to control inflation through the draconic hiking of interest rates.
The Bank of England always has a target of keeping inflation in check at around 2%. When prices start rising sharply, it’s their job to reduce household spending to temper demand in the economy.
“The job of cutting inflation is for the Bank of England not the government. So it was always inappropriate for the government to have a target/pledge to halve inflation.”
Paul Johnson – Institute for Fiscal Studies
The biggest factor that contributed to rising inflation on a global scale was the increase in energy prices. As an external factor, no country has been able to avoid this as it isn’t a domestic factor that can be directly controlled. It was predicted that inflation would fall once the hike seen in October 2022 was more than a year previously. As predicted, gas prices came down 31%.
Following the fall in energy, food inflation also came down. Both of these factors have as little to do with domestic fiscal policy as the weather, so it has been a completely false narrative for the government to attribute these decreases to their direct involvement. Even though Jeremy Hunt has been keen to point out that spending has been down, as well as borrowing, this has more to do with public finances than inflation.
There is truth in how reckless government spending and borrowing can drive inflation higher, but this would then impact public finances more. Taxing and spending are directly controlled by the government, but these have no impact on external factors that drive inflation. One internal factor that has been influenced by this is driving more people back into work.
An increase in taxation through freezing tax thresholds amongst rising wages has had some effect. Perhaps the only real impact the government has had on inflation directly is by increasing income tax. By reducing household budgets and disposable income, it has dampened demand in the economy. However, no government would ever admit that it helped reduce inflation by raising taxes.
Is Rishi Sunak Right?
Despite displaying his success on social media, was Rishi Sunak right to celebrate the success of his government in how it brought down levels of inflation? In short, no. Little more than a last ditch effort to win favour with the electorate, it was easy to announce, knowing that the Bank of England and the calming of external factors would tick it off the list for him. While increasing taxation has had an effect in bringing inflation down, the most important, larger factors cooled by themselves.
Combat Inflation Yourself
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