The government takes out a loan to reduce inflation – should it? | Business news

There is evidence to suggest that the government’s actions were intended to raise prices rather than lower them. It is retailers and the Bank of England who deserve credit.

From a 40-year high of 11.1% in October 2022, the headline rate of inflation – the Consumer Price Index (CPI) – has returned to within striking distance of the Bank of England’s target rate of 2%.

The government will, of course, try to take credit for this. Rishi SunakDespite everything, promised to halve inflation last year and I immediately mentioned it when it happened.

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It was brazen impudence that brought to mind the old saying, “success has many fathers, failure is an orphan.”

Because if someone deserves recognition lowering inflation to the target interest rate, it probably is Bank of Englandwhose interest rate increases from December 2021 to August last year, has dampened demand and some of the inflationary pressures that can build in the economy when demand is too high.

Can the government take a loan?

To the extent that the government can take credit for lowering inflation, it is because – since the debacle Liz Trussshort stay at 10 Downing Street – Rishi Sunak i Jeremy Hunt restored order to public finances, easing the market panic that broke out as Mrs Truss sought to introduce measures Unfunded tax cuts worth £45 billion.

WITH the depths he had plumbed following the mini-budget in September 2022, sterling rose by 22% against the US dollar and by 8% against the euro.

Assuming things remain unchanged, this has lowered the costs of goods and services that the UK buys from the US and from eurozone countries, which may have had a marginal impact on inflation.

How government policies actually caused inflation to rise

However, government policies helped increase inflation in other ways. Public sector wages increased by 6.3% year-on-year between January and March – the most recent period for which data is available. This, of course, translates into higher prices.

The Chancellor also actively increased inflation by increasing it tobacco taxesjust like he did last year.

The government has also just increased the National Living Wage by 9.8%, the biggest increase on record, which will again translate into higher prices, particularly in sectors such as hospitality.

So the government – now with a general election scheduled for July 4 – can’t actually take all that much credit for bringing inflation down to target.

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Loan for the Bank and retailers

The Bank’s Monetary Policy Committee deserves more. Some UK retailers are doing the same.

The latest data published The British Retail Consortium suggests that store price inflation was at an annualized rate of just 0.8% in April, down from 1.3% in March.

In other words, by lowering prices, retailers contribute greatly to reducing inflation. The market is competitive and consumers benefit from it.

In fact, however, the greatest burden in reducing inflation comes from the so-called “base effects”, i.e. the impact of the corresponding “base” from the previous year.

To use a real example from the Office for National Statistics, meat prices fell by 0.5% between February and March this year, compared with an increase of 1.4% during these months last year. This resulted in an annual meat price inflation rate of 3.1% in the year to March 2024, which was the lowest level since November 2021.

Prices may continue to rise but may still contribute to a lower headline inflation rate. If the price of an item in the inflation basket increased by 10% in April last year, but only increased by 5% in April this year, this automatically translates into a lower headline inflation rate.

This can be seen from today’s data: household cuts energy price ceiling introduced by Ofgem in April this year. contributed significantly to reducing inflation.

Where does the problem of inflation come from?

Inflation took off in 2022 mainly due to Russia’s invasion of Ukraine, which raised the price of oil and – thanks to Ukraine’s position as one of the world’s largest exporters of corn, seed oils, wheat and rapeseed – a whole range of food products.

There was another boost when China abruptly eased its Covid-19 restrictions in late 2022 and early 2023, triggering a big surge in demand from the world’s second-largest economy for commodities such as oil. This caused prices to increase elsewhere.

Prices for some of the biggest items in the UK’s inflation basket – food and non-alcoholic drinks, clothing and footwear, furniture and homewares – are not rising at the rate they did last year, and certainly not at the rate they will in autumn 2022.

This is the main reason why inflation has returned to the Bank’s target level.