Sticky inflation takes shine off Reeves’ week
If the Chancellor was hoping to bask in the glow of supportive front-page coverage the morning after her Mansion House speech, she would have been disappointed.
The spectacular revelations of Whitehall’s hushed-up cock-up over Afghan refugees knocked her off the top of the news agenda pretty much across the board. Only Morning Wire gave her speech the front-page treatment, and we were happy to do so.
However, even if Rachel Reeves had been able to enjoy a clean sweep of the printed press, the thrill wouldn’t have lasted for long.
At 7am yesterday morning, the latest inflation data dropped – and set the Chancellor up for another tough day at the office. Most economists were expecting the rate to either remain the same or nudge up by a fraction. Not for the first time, the economic consensus was wrong.
The UK is now experiencing the highest rate of inflation in the G7 while the economy contracted in April and May, leading to the reappearance in analyst notes of the dreaded word ‘stagflation’ just a day after Reeves spoke of having fixed the foundations of the economy.
The Chancellor recognised that the climbing rate of inflation means the cost of living crisis is enduring, and she pointed to the recent hike in the minimum wage as one of the ways in which the government is helping.
Unfortunately, that additional cost to business is one of the reasons why inflation has spiked again, along with the impact on firms’ overheads from the increase in national insurance contributions.
It’s not just the Chancellor grappling with inflation; the Bank of England will now have to weigh it up against the latest labour market data – published this morning – ahead of its next interest rate decision.
Governor Andrew Bailey has been laying the ground for a couple more rate cuts this year, citing the cooling labour market, but the latest inflation number will give pause for thought. JP Morgan Asset Management observed yesterday that “unfortunately for the BoE, things will likely get worse before they get better.”
Threadneedle Street had been counting on inflation peaking at 3.7 per cent by the end of this summer, but that was before yesterday’s higher than expected figure.
With growth elusive, business confidence tanking, unemployment climbing and all eyes on a tax-hiking October budget, it’s hard to see where the good news might come from for the Chancellor, or the rest of us for that matter.