Sunak’s inflation win: not all that it seems?

When Rishi Sunak announced in January that he wanted to see inflation – then running at an average quarterly rate of 10.7% – "halve" by the end of the year, plenty of people "were inclined to smirk", said Simon English in the Evening Standard. 

Given that the main drivers of inflation lay in global factors beyond his control, the pledge seemed like a hostage to fortune. Well, fair play to the PM, a man "who seems not overly blessed with good luck", for pulling it off. 

This week's figures showed a sharp fall in headline inflation to 4.6% in October (a big drop from September's 6.7%), all but ensuring that he'll keep his promise. The fall is largely down to the end of the "energy crunch" and 14 consecutive interest rate rises – but it'd be "churlish not to give the PM a tip of the hat". On this score, at least, he can declare victory.

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'Pivotal moment'

Tory officials view the announcement that Sunak has met the first of his "five priorities" as a "pivotal moment", said George Parker in the FT: the juncture at which they can "start mapping out a more optimistic economic picture" ahead of next year's expected general election. "Better news on inflation is expected to be mirrored by a better than expected fiscal situation" when the Chancellor, Jeremy Hunt, delivers his Autumn Statement next week – giving him "some modest scope for targeted tax cuts". Harriett Baldwin, the Tory Chair of the Commons Treasury Committee, reckons that, despite the economy's travails, it will be a "feel-good" statement.

That would ignore the bigger picture, said Phillip Inman in The Observer. "Slower price growth, due partly to tighter Treasury purse strings, won't lift the gloom of a flatlining economy", which has expanded by just 0.6% over the past year, with little hope of imminent change. The Bank of England has signalled that interest rates will remain at their 15-year high of 5.25% for much of next year. In the meantime, "the long-term outlook for UK plc will be increasingly dismal".

'Plenty of reasons to be sceptical'

Is inflation really licked? One thing muddying the waters, said Kate Andrews in The Spectator, is this week's wages update, which showed that annual growth in regular pay rose by 7.7% between July and September – the "fastest in two years". The worry is that a "wage-price spiral" could lead to "a secondary wave of price hikes". There are plenty of reasons to be sceptical: "the underlying causes of inflation" are more closely linked to monetary decisions and "influxes in money supply"; and wages have only been rising in real terms for a few months.

But it matters because BoE policymakers "are inclined to lean into" the wage/spiral theory. Markets may think that we've reached the peak of rate hikes; but it isn't a done deal yet.