The unexpected rise in UK inflation in December has reopened the debate about the amount of credit – or blame – that the government should take when prices change.
Inflation has still fallen sharply over the past year. It was over 10 per cent when the Prime Minister made his pledge to ‘halve inflation’ last January. With the headline rate now down to 4 per cent, this target has been met.
What’s more, inflation is still lower than the Bank of England had been predicting. The November Monetary Policy Report assumed that inflation would average 4.6 per cent in the fourth quarter of 2023. It was actually just under 4.2 per cent.
The Bank was also not expecting inflation to return to the MPC’s two per cent target until late-2025. In reality, it should hit two per cent as soon as this April, once the recent declines in gas prices are reflected in the Ofgem cap on domestic bills.
However, the main reasons why inflation has fallen are that monetary policy has been tightened and that global commodity prices have eased. This is therefore down to the Bank of England, and world events, not the UK government.
At a stretch, the uptick in December could even be blamed on the Chancellor. The increase in tobacco duties in the Autumn Statement added 0.07 percentage points to the headline rate, enough to account for the bulk of the rise from 3.9 per cent to four per cent.
It would still be harsh to conclude that government decisions have played no part whatsoever in reducing inflation. The Bank’s job might have been harder if the Chancellor had not held the line on tax and spending. Actions taken to ‘make work pay’ may also have helped to boost the supply of labour.
But looking forward, other decisions will add to cost pressures, including increases in business rates and the near-10 per cent hike in the National Living Wage in April. This will be particularly unwelcome in the retail sector, which had a dire December.
The government could also do more to reduce burdens that are adding to the cost of living, including planning restrictions, Net Zero obligations, and ‘sin taxes’ that are far higher than anything that could be justified by any harm to others.
The upshot is that responsibility for success or failure on inflation may ultimately rest with the Bank of England, but the government should take a fair share too.
