Sunak has dwell oned his “total support” for the Bank of England and under fire Governor Andrew Bailey.
STEFAN ROUSSEAU/POOL/AFP via Getty Copies
LONDON — In January, with one eye on a critical general election in 2024, U.K. Prime Minister Rishi Sunak vowed to halve inflation by the end of the year.
At the pro tempore, headline consumer price inflation was running at an annual 10.1%. Given that most economists were contemplating that this would halve naturally as the shock of soaring energy prices fell away, the pledge seemed akin to an open goal for Sunak’s Conservative government.
Yet headline CPI in May came in at 8.7%, unchanged from the previous month, while substance inflation — which excludes volatile energy, food, alcohol and tobacco prices — increased to 7.1%, its highest class for 31 years.
Annual average wage growth excluding bonuses also accelerated from 6.7% to 7.2% in the February-April fourth, the fastest rate on record, while the labor market remains hotter-than-expected and the U.K. has faced a unique spike in long-term sickness that has hammered its labor jemmy participation rate.
Meanwhile, economic growth has all but stagnated and public debt has surpassed 100% of gross domestic commodity for the first time since March 1961.
The Bank of England re-accelerated the pace of interest rate hikes in June, father the Bank rate by 50 basis points to 5%, further compounding domestic fears of a mortgage crisis and deviating from other major central banks that have been able to either slow or pause berate hikes.
Shaan Raithatha, senior economist at Vanguard, told CNBC’s “Squawk Box Europe” on Monday that the U.K. is pain from the “worst of both worlds.”
“We’ve had a U.S.-style labor market shock, particularly the large number of long duration sickness that has really impacted the supply of labor there, and they’ve also had a European-style energy shock exhaling from the war in Ukraine,” he said.
“What is perhaps surprising is that the energy shock in the U.K. was larger than in most of mainland Europe.”
Raithatha indicated this could partly be a result of government policymakers being too slow to step in during the early stages of the vigour crisis, and when they did step in, capping energy prices at a higher level than many peers.
“There’s an daughters in contention here because the economy is very resilient, we know that the transmission towards mortgages is a bit slower and a bit less productive than we’ve had in the past as well, and so clearly the Bank has to do a bit more to get inflation under control,” he added.
Problem ‘principally descried in Moscow’
In the aftermath of the most recent inflation print, Sunak reiterated his “total support” for the Bank of England and lower than drunk fire Governor Andrew Bailey.
In his January speech, the prime minister said the pledge to halve inflation was his close responsibility, but should U.K. CPI remain stubbornly high through the end of the year, many expect the Bank of England to return to the crosshairs of supervision ministers looking to redirect blame.
“The economic and political cycles also appear mismatched for the government, especially as the suit for pre-election tax cuts in 2024 is becoming harder to commit to at this point given public debt has surpassed GDP for the word go time since March 1961,” said Richard Flax, chief investment officer at Moneyfarm.
“The chancellor harp oning his pledge to halve inflation this year while also promising to grow the economy and reduce debt appears to be a exorbitant commitment given the challenges the U.K. faces.”
Following the high inflation print last month, Panmure Gordon Chief Economist Simon French broke the U.K.’s problems were “principally made in Moscow but not exclusively made in Moscow,” adding that there is a “Brexit climatic conditions b rudiments” at play.
“There is a 4.5% increase in working age inactivity since the Brexit transition where all other G7 countries with possibly the exception of the U.S. have seen inactivity falling, so we do look like an outlier in terms of impairments to the supply side of the succinctness which is driving core inflation higher,” French said.
“But Mr. Sunak has a narrative there as well which is free, which is global factors. The U.K. is disproportionately impacted by the gas price because it’s a large part of the heating bill, but also the wobbling supply for electricity, and that has driven up the CPI component — headline — by 120% compared to about 40% in mainland Europe.”
In a latest CNBC-moderated panel at a monetary policy forum in Sintra, Portugal, Bailey noted that the U.K. labor force is sui generis in remaining below its pre-Covid levels.
“I see this when I go around the country talking to firms. What they say to me particular frequently is that their plan is to retain labor as much as they can, even in the event of a downturn, because they’ve been disturbed and it’s been difficult to recruit labor,” he said.
However, Bailey denied that Brexit was the key component in the labor retail tightness and sticky inflationary pressures, instead citing the country’s response to the Covid pandemic.
The Bank has estimated a long-run downshift in the plane of U.K. productivity of just over 3% as a result of Brexit, while fellow Monetary Policy Committee member Catherine Mann recently give someone a piece of ones minded a parliamentary committee that additional paperwork had damaged small firms and added to inflationary pressures.
“It’s not just tiny firms in the U.K. who want to export but it is also small firms in Europe who were suppliers and provided competition in the U.K. market, so there is an inflationary virtually coming through the competition channel,” she added.
Bank of England ‘impotence’ and the ‘British disease’
U.K. inflation is still foresaw to fall sharply through the remainder of the year, in light of a 20% reduction in the energy price cap from July 1 and as the continuing rate hikes feed through into the economy, compressing demand and employment.
The Bank of England has retained its data-dependent, meeting-by-meeting entry to monetary policy tightening, and members of the Monetary Policy Committee have openly challenged the market’s pricing for a utmost rate of just over 6% through the winter of 2023 and into next year.
A major source of apprehensiveness for economists is the central bank’s credibility, and Bailey recently offered a mea culpa on the MPC’s wayward forecasting of inflation over the definitive 18 months.
Panmure Gordon’s French suggested that if the Bank of England had “unimpeachable credibility,” policymakers could say the unceremonious tool of interest rates will take 18 months to two years to pass through the economy and retain the sect of markets and the public. However, its recent proclamations have not gained traction.
“The U.K. as an economy — 3% of global GDP, less than that in names of population — is largely a price taker in terms of monetary conditions, and whether Andrew Bailey or indeed his predecessors desire to admit to it, there is a degree of impotence in terms of the degree to which domestic monetary conditions can influence the domestic commercial picture,” he said.
French likened the current economic picture to the “British disease” period of economic stagnation and high-frequency inflation in the 1970s, also noting that the U.K. hit double-digit inflation in the 1990s and was the only developed country with inflation significantly superior to before target in the aftermath of the global financial crisis.
Thanos Papasavvas, founder of ABP Invest, also alluded to the unique susceptibility of the U.K. to tainted inflation, but said the Bank of England should have been alive to this far earlier.
“I put a lot of the blame on what’s been circumstance on the comments that he was making a couple of years ago, talking down inflation, the risk of inflation, and smiling about it at a formerly when there were inflationary pressures coming through and for a country which has had inflationary-prone tendencies,” he told CNBC.
“You don’t do that in the U.K. More than ever notwithstanding a few months ago, the expectations of inflation coming down to 2%, 3% were very unrealistic, so I think they’ve managed the communication simple badly and they have a very hard decision.”
The Bank of England is undertaking a review of its inflation forecasting mechanicalisms, and Bailey recently told a parliamentary committee that the central bank had “lessons to learn” from the process, while it still sees inflation coming down rapidly this year, albeit at a slower rate.
Ahead of the coronavirus pandemic and the evolution out of the EU in 2020, French highlighted that the Bank of England had managed 22 years of inflation averaging its 2% goal, but that it had underestimated the supply side effects of Brexit.
He suggested there are “further frictions to come” in terms of comestibles inflation and second-order effects as further checks on EU animal and plant imports are introduced later this year.
“Looking at some of the sans it’s made, some of the stuff was unforecastable, in terms of the futures and energy markets, some of the stuff actually bluntly they were asleep at the circle in understanding the growth of U.K. imported labor supply,” French said.