November 16, 2023 - 4:30pm
The inflation numbers just released by the Office of National Statistics (ONS) have come as a welcome reprieve for a beleaguered government. The data shows that inflation fell substantially more than expected, dropping from 6.7% in September to 4.6% the following month, rather than the forecasted 4.8%.
Rishi Sunak’s government, whose standing in the polls has fallen since the sacking of former home secretary Suella Braverman and the subsequent Cabinet reshuffle, was quick to jump on the inflation numbers as a victory. In an email to supporters, Chancellor Jeremy Hunt claimed that “as of today, we’ve halved inflation.” The inclusion of references to Sunak’s five promises from the beginning of this year, one of which was to halve inflation, left one wondering what had happened to the other four pledges.
The story behind the decline in inflation is not as optimistic as the Government has suggested, however. The main driver was the fall in “housing and household services”, which in turn was caused by a drop in energy prices. Yet, as the ONS noted, “although electricity and gas prices have fallen on the month and the year, their prices are still high in comparison to recent years.”
Then there is the elephant in the room: the possibility that the sharp fall in inflation might also be a sign of an impending recession. If inflation were coming down and the economy still chugging along, we might chalk this up as a straight victory. But the economy has barely grown since this time last year, while the unemployment rate has been ticking up since April. Taken together, these two indicators raise recession red flags.
The inflation data gives further clues that the economy might be on a downward trajectory. The two other components besides energy bills which helped drive down the inflation rate are “food and non-alcoholic beverages” and “restaurants and hotels”. It is possible that this reflects falling food prices being passed through to the consumer, but it is also possible that Britons are spending less in these sectors. The ONS has not released detailed employment data at an industry level since August, but the figures we have suggest that hospitality might be taking a bruising, given that employment in the sector fell 4% in the second quarter of 2023 from a year earlier.
Some economists are saying that Britain is already in a recession and the data has simply not caught up. An analysis by Bloomberg at the start of November reported that internal models demonstrated a 52% chance of recession in the second half of 2023. Meanwhile, the housing market data released together with the inflation numbers showed the first annual decline in 11 years.
British politics is currently in a state of disarray. The Labour Party is divided, with mass defections of frontbenchers over the Israel-Hamas war. The Tories have alienated their base with the Braverman firing and the appointment of David Cameron as Foreign Secretary.
It appears to be an opportune time for the Tories to eat their losses, call an election and let a deeply split Labour Party try to form a government. More likely, though, the strategists at CCHQ will sit on their hands and let the party slide into an election just as the British economy risks sliding into a recession. That could end up having far more serious repercussions for the Tory Party.
Philip Pilkington is a macroeconomist and investment professional, and the author of The Reformation in Economics
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SubscribeThis is about the 4th time in the last 2 years that we have heard that the British economy is probably in recession but the numbers haven’t caught up yet. Meanwhile while we have had 0.3%, 0.2% and 0% quarterly growth this year, Germany, Ireland, The Netherlands, Portugal, Denmark, Austria, Finland and the Eurozone as a whole posted a negative Q3 and many have had two (non-consecutive) negative quarters.
Things are further complicated by the fact that the ONS keeps making retrospective changes to the GDP figures (and employment figures and population figures).
The best way to check if the economy is in recession is to ignore the stats and have a walk around your town or village at night and see how many people are in the pubs and restaurants. So far they still seem pretty busy to me.
Everybody really needs a drink right now, and who could blame them?
In many places in the country the pubs and restaurants are boarded up. You live in an affluent area which will be alright no matter what. Especially if like mine many of its consumers have their spending power triple-locked.
I agree with the main point – that there’s no victory here for this hopeless Tory government, which is little more than a piece of driftwood on the ocean of world events at this stage.
However, ever since the ERM debacle 30 years ago, I’ve always thought that the technique of controlling inflation through interest rate hikes is a failure in itself. Inflation is a failure of bad monetary policy, and interest rate hikes are themselves monetary policy. So it’s destructive monetary policy to solve the problems of previous bad monetary policy. It works by two principle mechanisms: firstly that a higher return on cash makes the currency worth more on global markets, thus contributing to a deflationary effect, and secondly it sucks demand out of the consumer economy by making everyone’s debts harder to service – principally mortgage payments.
In what mad world does anyone consider torturing the consumer economy to suppress demand a justifiable means of controlling inflation? It’s just another way of making us all poorer so we can’t buy and invest as much. And the justification for this is that if the Bank of England doesn’t do it, inflation will make us all poorer. It’s the same as prescribing leeches for a headache or anything else that medieval doctors didn’t understand.
And while it may appear presumptuous of someone like me to tell the great and good of the Bank of England that they don’t know what they’re doing, I and thousands of other laymen said at the time the government printed £400billion during the pandemic and used it to pay millions of people to sit at home doing nothing that this was economic lunacy, but apparently the Bank’s experts couldn’t see a problem. So boo to them, as far as I’m concerned.
So they’re celebrating that prices are still going up, but just not so fast. And all that built on a manipulated CPI, understating the base number. Certainly no victory.
I expect the strategists know exactly what Philip knows. It’s the Micawberism in the politicians which persuades them to hang on. Good news is just around the corner. It has to be…
Those of us who were involved in politics in the runup to 1997 are getting a terrible sense of deja vu.
We just know that we are not 21.17 per cent better off than we were in October 2021. Last month’s Retail Price Index rate of inflation was 6.1 per cent. In October 2022, that rate was 14.2 per cent. Can you feel the difference? An item costing £100 in October 2021, cost £114.20 in October 2022, and cost £121.17 in October 2023. While it is good to have this confirmed, we all knew it, anyway. But oh, for a Minister for Common Sense, since no party understands any of this.
“Rishi Sunak doesn’t realise a recession is on the horizon”.By what possible means does the author know that?
It’s pretty much the same in the U.S. The bottom line is that no one really knew what would happen after the hangover was felt from creating and pumping trillions of dollars and pounds into the economy while people were sitting at home during the plandemic. We might be simply returning to the norm, but that is too boring of a narrative.
So the Author’s suggestion – ‘throw the Labour party a hospital pass and hide’. A political strategist seeking a Central Office commission?