Yahoo Finance Five reasons why people feel poorer under Sunak
Growth is going “gangbusters”. Wages are surging. And inflation is back under control.
Rishi Sunak knows good economic numbers when he sees them and has seized on signs of recovery to launch his election campaign.
The Prime Minister is particularly proud of the victory over inflation. He entered No 10 at the peak of the cost of living crisis, shortly before inflation peaked at more than 11pc.
Sunak pledged to cut that in half in 2023, and sure enough inflation has tumbled. The latest figures show the rate of price rises stood at 2.3pc in April – effectively back to the Bank of England’s 2pc target for the first time in almost three years.
Better still, average wages are growing faster than prices as the economy rebounds from recession. Britain is now growing at the joint-fastest rate in the G7.
Grant Fitzner, chief economist at the Office for National Statistics (ONS), used the word “gangbusters” to describe the performance.
The typical family is becoming better off as wages rise, price pressures ease and the benefits of two cuts to the National Insurance rate hit people’s pay packets. Pensioners are also doing well after being insulated from the cost of living crisis by the triple lock.
So why doesn’t everyone feel better off?
The reason is prices are still rising and mortgage costs remain far higher than they were before the inflation crisis began. While wages are finally rising faster than prices, there is a lot of ground to make up and most of us are still worse off compared to a few years ago.
The official target for inflation, given by the Government to the Bank of England, is to keep consumer prices rising by 2pc per year. This is meant to ensure there is enough impetus for growth in the economy, preventing stagnation.
In normal times, wages should roughly keep pace with inflation, ensuring living standards remain stable.
But after a period of breakneck price rises, expenses are still much higher than they were a few years ago even as inflation cools.
In August 2021, the typical worker earned £544 per week in regular wages, before bonuses.
Today, they receive £637, an increase of 17pc.
That is not so bad, one might think, but prices have risen faster. The consumer price index (CPI) has risen by more than 19pc since August 2021.
As a result, real earnings in March, adjusted for inflation and living costs, were 1.8pc lower than they were in August 2021, according to ONS figures.
On that basis, workers are £9 a week worse off compared to three years ago: their spending power has gone down, even as their monthly pay has gone up.
There are also taxes to consider. Here, the effects have been mixed, depending on your earnings. This is because of the variety of changes: there have been threshold freezes – a classic stealth tax – but also cuts to the headline rate of employee National Insurance.
The bottom 40pc of earners and the top 10pc are paying more tax this year than in 2021, according to the Institute for Fiscal Studies. In some cases, people are paying up to £500 more.
The remaining 50pc are paying less tax. Those who earn around £50,000 per year are the biggest beneficiaries of recent policy changes, which have saved them around £1,000 compared to 2021.
Pensioners are also doing well. They have benefited significantly from the triple lock, which increases the state pension by the highest of inflation, average earnings or 2.5pc each April. This has in effect insulated them from the cost of living crisis: the state pension has risen by more than 23pc since August 2021, outstripping the 19pc rise in prices over the same period.
Another reason why some people may not feel better off is because individual prices that people pay a lot of attention to remain elevated.
Household gas bills are still two-thirds higher than they were three years ago and electricity is up 42pc.
It is a similar story with petrol: a litre now costs £1.57 on average, down from the peak of £1.99, but still 20p above the £1.37 typically seen in August 2021.
In the supermarket aisles, some items are now cheaper than they were a year ago.
Two pints of semi-skimmed milk costs £1.24, down 6p on the year. A standard 250g block of butter sells for £2.16, down 18p from April last year. A jar of jam is 4pc cheaper, and the price of a packet of frozen fish fingers has fallen by 6pc.
But average food prices are still almost 30pc above where they were in August 2021.
The jump in price seen for some individual items seems particularly deranged. The price of olive oil, for instance, has more than doubled. A typical bottle now costs £8.40, according to the ONS. A kilogram of sugar costs £1.19, up more than 70pc in less than three years.
The headline inflation number that Sunak pointed to is also somewhat narrow. CPI only tracks products, but other costs have also increased.
Housing is the most critical. Average mortgage payments have risen from £714 a month in August 2021 to £911, a rise of more than one-quarter.
Rents are also rising fast with the typical payment by tenants up almost one-fifth to an average of £1,254 per month, according to the ONS.
Offering hope on housing costs before the election requires an interest rate cut from the Bank of England. This would lead to lower mortgage rates.
Since the Old Lady of Threadneedle Street was given operational independence in 1997, decisions on borrowing costs have been out of the Government’s hands, precisely because it was considered dangerous to have politically motivated rate cuts before elections.
Now that inflation has dropped almost to the Bank’s 2pc target, and with further falls expected, June’s policy meeting might seem the perfect time to cut the base rate from its 16-year high of 5.25pc.
It would certainly reinforce the Prime Minister’s case that the crisis is over and things are heading in the right direction.
However, there is no guarantee that the Bank’s policymakers, led by Governor Andrew Bailey, will cut borrowing costs in time for the election.
They want to see inflationary pressures in the domestic economy back under control and, while the headline rate is encouraging, there are still worrying signs beneath the surface.
Rate-setters are particularly worried about services price inflation, which is heavily dependent on wages. This is still running at 5.9pc, a dangerously high rate.
Officials may also be wary of appearing political. Since it was made independent in 1997, the Bank has never changed interest rates close to a general election.
Sunak’s argument to the public is that all of this is a minor wrinkle. His economic plan is working and the dividend is in the post.
“Inflation is back to normal,” the Prime Minister said on the steps of Downing Street. “This means that the pressure on prices will ease and mortgage rates will come down. This is proof that the plan and priorities I set out are working.”
Bill Clinton’s election guru James Carville famously summed up their successful campaign strategy as “It’s the economy stupid”. Sunak is fighting a similar battle, and hoping for similar results.
Yet with the benefits of a rebounding economy and falling inflation not yet totally apparent in people’s pockets, the Prime Minister’s strategy is a risky one.
