Matthew Lynn

Labour is staring down the barrel of an inflation crisis

Rachel Reeves (Credit: Getty images)

With job vacancies falling, and with GDP contracting, the Chancellor Rachel Reeves might have assumed that her final week before Christmas could not get any worse. Unfortunately, she will have been disappointed. We learned today that inflation is now rising sharply again, with the Office For National Statistics reporting that the rate has risen to 2.6 per cent – the highest level for eight months. The real problem, however, is this. It is going to get a lot worse over the next few months – and the Chancellor will only have herself to blame.

In response to today’s inflation data, Reeves tried to maintain that the figures were ‘broadly in line’ with other countries, and insisted that she was 'taking action to address the ongoing cost of living challenge', whatever the heck that might mean. And yet, on closer inspection, it turns out that all the actions she is taking are only going to drive the rate even higher. 

In reality, there are three ways that Reeves is pushing prices up. First, the huge rise in employers National Insurance (NI) imposed in her Budget in October will end up being passed on, both in the form of lower wages, and in higher prices as well. You can expect the cost of your haircut or your dry cleaning to go up because the company providing it has to pay higher NI, and that has only just begun. Next, the government has awarded a series of above-inflation pay rises to the public sector, unaware that those will have to be matched by the private sector if businesses are to hang on to their staff. Finally, it has pushed through a big rise in borrowing and state spending at a time when the UK is already at full employment – there may be millions of people on sickness benefits but they are unfortunately not looking for work – so all the extra demand the government is creating can only result in a higher rate of inflation. 

Add all that up, and one point is clear. The rate of inflation is only going to go up again. Even worse, prices may be subdued globally right now, but if President Trump imposes huge tariffs, if there is a trade war with China, or if there is a global conflict, the outlook will get far worse. Reeves inherited an economy whose inflation was within the Bank of England’s target range, and recklessly drove it higher. It is likely to keep climbing over the next few months, potentially forcing the Bank to raise rates as well. In reality, she has blundered her way into a serious round of inflation – and it is already too late for her to do anything about it. 

Written by
Matthew Lynn

Matthew Lynn is a financial columnist and author of ‘Bust: Greece, The Euro and The Sovereign Debt Crisis’ and ‘The Long Depression: The Slump of 2008 to 2031’

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