In his brief statement to the House of Commons on the crisis in the cost of living in the United Kingdom, Rishi Sunak managed to alleviate two economic problems, but at the expense of aggravating a third.
The good news is that their actions are likely to reduce the maximum rate of inflation this year and will help UK households cope with the immediate problems of the cost of living. But they will also deliver the hottest of inflationary potatoes directly to the Bank of England.
The chancellor also left big questions unanswered about what will happen to home support next year.
The first effect of the measures is likely to be mechanical, reducing the expected rise in inflation and potentially avoiding the dreaded rise above 10% this autumn.
If household energy bills rise to about £ 2,400 a year on average instead of the level of £ 2,800 Ofgem said this week was likely, inflation is unlikely to rise as much as previously expected.
This is uncertain because the National Statistics Office has not announced whether it will qualify support as a reduction, which would limit rising inflation, or as support for income, which would have no impact on the rate of inflation. measured inflation.
While this difference is mostly semantic, as a downgrade and income support make households improve to the same extent, most economists think the ONS will rule that the package will reduce the rate of inflation.
Ben Nabarro, Citi’s chief UK economist, said he expected the £ 400 discount to reduce the maximum inflation rate in October by 1.3 percentage points from where it would otherwise be.
He said this would mean that “consumer price inflation would peak at an annual rate of 9.5 per cent” and retail price inflation at 11.5 per cent. This would reduce the cost of servicing the £ 500bn debt of the government, which is linked to RPI.
But while households will be helped with universal support, along with more specific assistance for those receiving benefits according to resources, pensioners and people with disabilities this year, economists noted that, on average, homes would be even worse.
Paul Dales, chief economist at UK Capital Economics, estimated that average real disposable household income would now fall by 1% in 2022, although this is an improvement over the 2% fall expected before the chancellor would deliver his statement.
The big question is whether the package will increase consumer spending and encourage companies to raise prices, which will fuel inflation next year and ultimately leave households in a better position.
An aide to the chancellor agreed that the stimulus offered by the package could be considered inflationary, but said the net support was not so great.
Sunak, on the other hand, went through the difficult task of controlling the level of inflation in the central bank. “I know the governor and his team will take decisive steps to return inflation to the target and ensure that inflation expectations remain firmly anchored,” he said.
You are viewing a snapshot of an interactive graphic. This is probably because your browser is offline or JavaScript is turned off.
Economists agreed that Sunak’s actions would act as a stimulus, making it more likely that the BoE would raise interest rates faster and farther than previously expected, but disagreed on the scope of the move. monetary tightening needed to offset this fiscal momentum.
Kallum Pickering, a senior economist at Berenberg Bank, described the chancellor’s package as “wrong” because “it will add to demand at a time when private wages are rising.” . . and most households have accumulated excess savings during confinement. “
“Keep it up and finally the BoE will be forced to control inflation by raising rates well above neutral and causing a recession,” he added.
But Robert Wood, the UK’s chief economist at the Bank of America, said the package would require the BoE to only impose “modestly higher interest rates” because tax revenues were also rising unexpectedly rapidly.
Nabarro, who also thought the package would only put marginal pressure on the central bank to raise inflation, said signs of further tax cuts in the autumn budget were more worrying about the likely impact on inflation. interest rate.
“The question now is whether the chancellor will return for more before the end of the fiscal year. That seems increasingly plausible,” he said.
Economists also disagreed on the exact level of stimulus Sunak had provided. He told the House of Commons that the package would cost £ 15bn, offset by a £ 5bn extraordinary tax on North Sea profits.
But some economists said the chancellor underestimated the full stimulus of his package because he did not count on abandoning his February plan to recoup £ 40 a year for five years from a £ 200 loan to help the households to pay their energy bills.
Sandra Horsfield, an economist at Investec, said: “The real tax support now in relation to what was put on the table in February [is] about £ 5 billion more [than £15bn]. ”
The chancellor could plausibly state that in the future the unexpected tax will continue to raise around £ 5bn a year until its expiry clause is activated by the end of 2025. He said this would only happen if energy prices remained high, although he did not specify the price threshold at which the tax would be phased out.
The chancellor himself noted that the problem of inflation was becoming more widespread, with price increases of more than 3% in four out of five categories of goods and services. As a result, economists and financial markets expect interest rates to be significantly higher.
JPMorgan’s chief UK economist Allan Monks said the package would help “get the economy out of the recession” in the short term, but would have a higher interest rate than the current 1 per cent rate. one hundred.
“This would mean that the BoE will continue to walk at every meeting until November, taking rates of up to 2% by the end of the year and then up to 2.75% next August,” he said.