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Rishi Sunak believes he will achieve his main goals this year.Institute for Fiscal Studies is Not sure. In the United States, Joe Biden has already done it. The question is whether the British Prime Minister can halve inflation by 2023.
When Sunak first made the pledge in January, it seemed no more challenging than predicting falling water levels after high tides. Indeed, there are now some doubts about whether consumer price growth will halve from 10.7% in the fourth quarter of 2022, suggesting that inflation continues to be damaging. From a political perspective, there is strong evidence in the United States that even if Sunak and his chancellor, Jeremy Hunt, succeed, the public will not trust them.
last week’s poll It shows that 74% of registered voters in the United States believe that inflation has gone in the wrong direction in the past year. Of course, they are objectively wrong, as annual U.S. price growth has fallen from 8.4% in July 2022 to 3.3% a year later. But in this case, public sentiment is closer to the truth than economic statistics.
Inflation is usually measured on a 12-month cycle, but over the longer term, public complaints become apparent immediately. In the past two years, prices have increased by more than 12% in the United States and more than 17% in the United Kingdom. Regardless of who is blamed for the cost shock, neither figure captures price stability.
Economists and politicians who focus too much on annual inflation rates mistakenly see concrete economic statistics as what really matters to people—not having to worry about prices.
Even worse from a political perspective is the evidence that the vast majority of the public confuses the rate of inflation (price increases) with the price level. So when politicians or central bankers celebrate falling inflation, this group feels cheated because prices are not falling. This further erodes public trust.
Johnny Runge of King’s College London, who studies public understanding of economics, told me that falling inflation is a particularly difficult idea to convey. That might be good news, but “the public is unlikely to notice,” he said.
Even if wages catch up with prices (as is the case in the US and is starting to happen in the UK), the problem does not go away. Wage increases are taxed, with the marginal direct tax rate on average earnings in the UK being 32%. This means that total wages growing at the latest headline rate of 8.5% will result in take-home pay growth just above the inflation rate of 6.8%.
The real-world impact of economic statistics illustrates the corrosive nature of inflation—and the trouble it causes. When prices lose stability, people have to work harder for pay raises, consider changing jobs and change spending habits as some goods and services become unaffordable.
Economics often assumes that these adjustments are cheap and almost automatic. But every decision leaves a bad taste and forces an unusual focus on how much things cost. It’s no surprise they’re angry.
Why, you might ask, were Ronald Reagan and Margaret Thatcher popular when inflation fell in the mid-1980s. This is likely because when they came to power, people saw the prospect of ending long periods of high inflation. Fairly or not, today’s politicians are accused of undermining subsequent long-term relative price stability.
It is therefore easy to understand why the public has been unimpressed by the fall in inflation so far and is likely to continue to be so. Sunak and Hunt would be better off putting Union Jack bunting in a box in Downing Street. Lower inflation will not save the Conservatives’ economic reputation.
chris.giles@ft.com
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