The vaccines are rolling out. Lockdown is easing, the EU has been forgotten about, and the Labour party has returned to its traditional pastime of plotting furiously against its leader. No one is even talking about wallpaper anymore. Things could hardly be going better for Boris Johnson, and that has been reflected in local election results and in the polls. There is one looming threat, however. The return of inflation. In truth, rising prices have been destroying governments for a hundred years, and it would be complacent to imagine this one will be the exception.
As figures out today make clear, prices are starting to rise again. The headline rate of inflation doubled to 1.5 per cent from 0.7 per cent in March. True, as the economists will be quick to point out, there are a lot of one-off factors in there. Energy has gone up sharply, after the dramatic fall in the oil price — it went below zero at one point — as the Covid-19 crisis began. There are supply bottlenecks as Covid restrictions continue to bite, both for goods and services. Those will pass in time.
And yet there are also longer term worries that have spooked investors. President Biden has embarked on a tax, spend and borrowing spree the likes of which has not been witnessed before in peacetime. The focus on climate change is leading to more expensive technologies. And, in this country, finally controlling immigration is likely to lead to a sharp rise in labour costs. Increasing wages is welcome in itself — especially among lower skilled workers, who are long overdue a pay rise — but it will also trigger a round of cost-push inflation. Add it all together and it would hardly be a surprise if we saw a return to 1980s or 1990 levels of rising prices, even if not the dreaded 1970s. After all, central banks have been missing their inflation targets for the last 20 years (admittedly mostly on the downside). It is optimistic, to put it mildly, to assume they will start getting it right now.
And yet that is a huge threat to the government. Why? There are two reasons. First, it hits the red wall hardest. As holidays, houses, and restaurant meals become more expensive it will be people on low-to-middle incomes who will inevitably suffer the most. But they are now the core Conservative voters. Next, it will place limits on the government's ability to borrow and spend. If the markets become seriously worried about inflation, as they soon will, then it will be a lot harder to borrow more, and expanding QE will only make the problem worse.
For the last year Johnson and his Chancellor Rishi Sunak have cheerfully assumed there are no constraints to borrowing, nor are there any limits to their freedom to intervene in the economy. But that is not really true. There are always constraints, and the markets may well be about to impose them. No one has really worried about inflation for a quarter of a century. But it has a long history of destroying governments. And Johnson would be complacent to imagine his won’t eventually be among them.