‘Inflation easing’ only tells one part of the story

It is very much a relative victory – there are still some disturbing trends

Inflation is down. It’s good and bad news, though. It’s good, because things might be much worse. Were it not, for example, for the government’s subsidies on energy bills, inflation would be even higher than it is now, though probably have edged a little lower. Also, if a really strong price-wage spiral had become entrenched in the economic system, then prices would be still higher than they are now.

Wages went up by six per cent a year, on average, we learned this week, with private sector settlements at 6.9 per cent. That’s the highest in a long time, and will help defray higher prices in the short term; but is still far lower than the increase in the cost of living. Real wages – meaning their actual purchasing power – are falling, and significantly by historical standards. Yet that very fact will help keep business costs and future inflation lower – and with it, interest rates and taxes.

There are encouraging signs. Petrol and diesel prices are down, because of trends in world markets. Energy bills remain high, but unless they double again then the statistical effect will eventually wear down – they can’t double every year. The previously mild weather has helped people as well. Nothing in the latest figures has been that surprising, and investors seem content that the policies of the government and Bank of England will indeed get inflation down. Rishi Sunak has pledged to halve inflation over 2023, and seems broadly on track.

But that’s not saying much, and that brings us to the bad news. A rate of inflation of about 5 per cent by this time next year would mean that prices in 2024 will stand on average about a fifth higher than they were at the time of the 2019 election. Taking the Tory years as a whole, what would have cost £100 when they came to power in 2010 will cost about £150 or more by the next general election. Wages have obviously failed to keep pace, and the tax burden on some has risen significantly in recent years.

We have not yet, in other words, recaptured the world of stable process and healthy economic growth that held from about the early 1990s to the global financial crisis of 2008. Even inflation at 5 per cent is way above the official target of 2 per cent. It is very much a relative victory in the fight against inflation and one that derives from past rises dropping out of the indices. Besides, there are still some disturbing trends.

Food prices, for example have come off worst from a perfect storm (a forgivable cliche) of forces. The war in Ukraine has restricted world supply of grains, cooking oils and fertilisers and thus pushed costs and prices of production higher. So did the shortages of farm workers caused by covid/long covid and Brexit. Energy prices and wages are also a substantial cost in food factories. The weak pound, again a by-product of Brexit, has pushed up the cost of imported foodstuffs; and Brexit red tape has slowed supplies and hampered UK exports of fresh produce such as shellfish.

All that adds up to a painful 16.9 per cent hike in the retail cost of food, actually worse than the previous figure: the price of a shopping basket of food jumped by 1.6 per cent in December alone, more than it used to rise over a whole year. Interestingly, prices in the labour-heavy hospitality sector are also still going up rapidly, reflecting higher wages and the labour shortage. “Home grown” inflation (such as it is) is the biggest medium-term danger to inflation becoming entrenched and institutionalised in pay bargaining. Hence the government’s attempts to keep wage settlements low.

Prices will almost certainly continue to rise in 2023, but at a slower rate than in 2022. The squeeze will continue. But you need to add to that factors not in the main CPI index, such as rentals – more an overhead than a price – and gradually increasing taxation, both personal and council taxes. You might also, looking more widely at living standards, take into account deteriorating public services; and of course rising interest and mortgage rates.

So the headlines about falling inflation only tell one part of the story. This year will hurt, and hurt the poor most.