Matthew Lynn Matthew Lynn

Inflation is the biggest threat to Boris

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.

President Biden has embarked on a tax, spend and borrowing spree the like of which has not been witnessed before in peacetime

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.

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