Sunak’s summer election means there’s bad news to come

British Prime Minister Rishi Sunak
Rishi Sunak's plan for an autumn election became increasingly risky - HENRY NICHOLLS/Pool photo via AP

“Inflation is back within the normal range – the economy is turning the corner,” so said Rishi Sunak on Wednesday, just after the Office for National Statistics (ONS) released data showing the UK’s consumer price index up 2.3pc during the year to April, down from 3.2pc the month before.

While this was a substantial fall, a sharper drop was expected – given a significant easing of food price inflation over recent weeks and last month’s lowering of Ofgem’s energy price cap. Many investors and analysts had expected April’s headline CPI inflation number to hit or even go below the Bank of England’s 2pc target.

But amid strong wage growth, and with underlying price pressures still elevated, that wasn’t to be. That’s why the Bank of England’s Monetary Policy Committee (MPC) is now unlikely to cut interest rates from their 16-year high of 5.25pc when it next meets on June 20.

Given that there is no MPC meeting in July (the committee meets eight times a year, not each month as is widely assumed), the earliest that rates could now be cut is August. And amid concerns that inflation might well rebound in late summer, the first drop in UK borrowing costs could be delayed even longer than that.

There are lots of reasons why Sunak decided to call an election last week, abandoning his previous strategy of waiting until October or even November. The logic behind an autumn election was that, by then, the economy would have significantly improved.

However, the April inflation number may have been the factor that ultimately tipped the balance.

Yes, CPI inflation is sharply down from its peak of 11.1pc back in the autumn of 2022 and is now at its lowest level since July 2021. But, as well as the still-above-target headline figure, much of the underlying data also points to continued price pressures.

Wages, for instance, were up 6pc on average between January and March, compared to the same period in 2023 – the fastest pace of pay growth in more than two years. That’s a big reason why inflation across the UK’s labour-intensive services sector, accounting for around four fifths of the economy, remained elevated at 5.9pc in April, only slightly down from 6pc the month before.

Food inflation has indeed fallen sharply – from an eye-watering 19.2pc as recently as March 2023 to just 2.9pc on the latest data. But that’s still higher than the 2.3pc headline number, which means food prices are still pushing inflation up, rather than helping to contain it.

And, on top of that, the ONS fine print reveals that core inflation – which excludes energy and food prices – is also still high, at 3.9pc last month, down from 4.2pc in March.

For all these reasons, there is now almost no chance that the MPC will cut interest rates when it meets in June. And any notion that the economy is being unduly squeezed by the 13 successive rate rises we’ve had over the last few years has perhaps been tempered by recent GDP data showing the UK escaped recession earlier this year.

The latest Purchasing Managers Index data, an influential commercial survey that foreshadows official growth numbers, showed the Manufacturing PMI measure for May rising from 49.1 to 51.3, a 22-month high – with measures above 50 signalling economic growth. The UK’s services sector PMI fell this month but remains at 52.9, still well within growth territory.

Until quite recently, Tory strategists were hoping that the MPC would cut rates two or three times before an election in October or November. The stickiness of UK inflation, though – the precise opposite of the Bank of England’s insistence that it will be “transitory” – has now put paid to that.

At the same time, there are signs that inflation could start rising again after the summer – not least due to energy prices. So far during May, oil has averaged around $84 (£66) per barrel. That’s some 14pc up on the average of $74 during May 2023 – a significant rise that will feed directly into the inflation numbers due to be published next month.

And as we go into the summer, such year-on-year “base effects” will likely become more important, as global growth gathers momentum, pushing up energy prices further. And that’s before considering elevated geopolitical dangers, spanning from the Russia-Ukraine conflict to the prospect of heightened turmoil in the Middle East, both of which could inflate energy and food prices even more.

US inflation is currently 3.4pc, up from 3.1pc back in January. Traders and investors are increasingly concerned that a similar “reversal” could happen in the UK, hemming in any inclination the MPC may have to cut rates any time soon.

There are, of course, political reasons why Sunak called a surprise early election on July 4. No 10 clearly now fears that, over the summer, clement weather could allow the number of illegal migrant Channel crossings to sky-rocket – making a mockery of Sunak’s pledge to “stop the boats”.

When it comes to the Post Office Horizon scandal as well, the fear is that the news will get a lot worse before it gets better.

The same is true of the Grenfell tragedy – in which 72 people died back in 2017. The final report into the London tower-block inferno, due for publication in September, is already on the Prime Minister’s desk.

It makes for grim reading – not least because, five years on from the first report into the Grenfell blaze, the Tories are yet to implement some of the key recommendations. Better, then, to go to the country before such a shocking report is published.

Faced with the prospect of more defections to Labour over the coming months it’s little wonder the Prime Minister brought this deeply ineffective Parliament to an end. But the main reason for this snap election, in my view, is that the Tories’ “go long, it’s the economy stupid” strategy lies in ruins.