Sunak Shouldn’t Count on Political Dividends from Falling Inflation

Is seeking credit for falling inflation wise politics? Sunak thinks so. In early June he declared it was “on me, personally” if the target was missed. Tory strategists seem convinced that the nation’s mood will lift as inflation falls, with Sunak’s apparent foresight granting the Conservatives goodwill from voters ahead of the next election. What’s fuelling such optimism is unclear; so far, there’s no evidence of any political rewards from price growth slowing.

Look at the facts. Despite inflation falling from 10.1 per cent in January to 6.8 per cent now, the Conservatives’ popularity remains underwhelming. The party’s polling share has flatlined at around 27 per cent throughout, consistently about 18 points behind Labour.

Moreover, YouGov’s tracking polls show 74 per cent of voters think the government’s doing a bad job on inflation; just 14 per cent say it’s doing well. Incredibly, those figures are worse now than in the new year.

The discontent is hardly a riddle. Voters are paying permanently higher prices for everything from broadband to bread. This is much more tangible to their lives than the slowdown in the rate at which those prices are increasing. A 17 per cent spike in the overall price level over three years was never going to sit well, especially when it dwarfs the Bank of England’s annual 2 per cent inflation target. Expecting voters to pop champagne corks today is delusional.

Yes, getting price inflation falling is a prerequisite for reviving living standards, as Sunak acknowledges. Wages, which almost always lag unexpected inflation, are now finally growing faster than consumer prices again and an aggressive catch-up there could shift the dial. Yet most families are still hurting. Real average pay has fallen over the last two years, the cost of essentials has ballooned, while real tax burdens are elevated by the government’s failure to uprate income tax thresholds in line with inflation.

Worryingly for Sunak, a sizeable chunk of the populace confuses “falling inflation” with “falling prices”. A recent National Institute of Social and Economic Research survey found that only 44 per cent of respondents understood that “inflation falling from 10.1 per cent to 6.1 per cent” would mean prices still rising, but more slowly. As many as a third thought it meant prices had fallen.

When the government celebrates inflation falling, then, many such voters expect to see their cost of living falling. They are, and will be, disappointed.

Across the Pond, there’s little solace for Sunak regarding what might happen politically when inflation falls further. Despite US inflation dropping to just 3.7 per cent, with low unemployment, two thirds of Americans still perceive their economy to be in the doldrums. President Biden’s economic ratings remain shockingly poor, and a recent Wall Street Journal poll revealed that 74 per cent of Americans think (incorrectly) that inflation has worsened this past year.

Now, it’s easy to write off such results as indicative of today’s “information environment” driving false perceptions. “There is no reasoning with this many people being this wrong,” lamented The Atlantic’s Tom Nichols last week. In the 1980s, voters better understood that inflation was falling under Ronald Reagan and Margaret Thatcher. Are today’s electors just misinformed?

To an extent, perhaps. Yet I also suspect the public’s perceptions about inflation are shaped by their baseline expectations. Reagan and Thatcher’s disinflations occurred after a decade of high and volatile inflation that people had come to anticipate each year, making inflation’s decline more evident. Both politicians, inheriting a mess, were seen as “inflation fighters”. Thatcher’s government even controlled monetary policy.

Our recent inflationary burst, in contrast, came after decades of relatively stable prices, underpinned for the most part by independent central banks. Inflation falling back down to “just” 6.8 per cent therefore doesn’t feel much like a normalisation yet. To the extent that voters think politicians affect inflation, at least as many are surely likely to blame the government as “inflation creators”, given all that pandemic borrowing, than to praise them for it falling back.

Most voters, in fact, just don’t appear to think Sunak’s government can be credited with the recent fall in inflation at all. In a YouGov poll for The Times last month, only 8 per cent held up government policy as causing the inflation decline, against 17 per cent putting it down to Bank of England actions and 38 per cent emphasising external factors such as receding oil and gas prices.

Given Sunak’s limited influence over monetary policy and global commodity supplies, the pledge was always an opportunistic gamble, aiming to claim credit for something that was already expected to happen.

Despite Sunak’s lack of control over inflation’s determinants, my colleague Dominic Lawson has said the PM expected voters to blame the government for the effects of the Bank of England’s tightening, so wanted at least to be associated with the positive outcome that such pain brought. That impulse is understandable: voters do tend to hold governments responsible for pain they endure. Yet it looks erroneous for the Conservatives to expect a symmetric popularity surge as inflation falls. Given the economic distress voters have experienced, their misconceptions about inflation and their doubts about whether government policy is even helping reduce it, it seems just as likely that Sunak’s pledge could backfire as a painful reminder of this inflation, rather than a celebration of it retreating.