Inflation shock as Jeremy Hunt expects prices to go back up again

Treasury braced for uptick again in August, after several months of progress

Adam Forrest
Political Correspondent
Sunday 13 August 2023 13:24 BST
BoE governor believes inflation will continue to fall after interest rate rises

Rishi Sunak’s promise to halve inflation this year has been dealt a major blow, as chancellor Jeremy Hunt expects the rate of price hikes to go back up again this month.

Hard-pressed Britons had hoped the end of the cost of living crisis was in sight, with inflation levels finally coming down in recent months.

The National Statistics is set to publish data for July this week, and is expected to show consumer prices index (CPI) inflation falling from 7.9 per cent to around 7 per cent.

However, The Independent understands that analysis by Treasury officials shows that inflation will rebound again in August – with the unwelcome reversal set to show up in figures release next month.

The turnaround could hurt Mr Sunak’s chances of meeting his January promise – one of his five big pledge to the electorate – to bring down inflation by half by the end of 2023.

It could also add to the pressure on mortgage holders and first-time buyers, who had got some good news this week when banks and building societies finally began reducing fixed-rate mortgage deals.

Bank of England governor Andrew Bailey insisted last month that inflation will fall “markedly” this year, even as he signalled the central bank would have to keep hiking the base rate of interest.

Officials played down the small uptick expected for August, since the month typically sees a rise in the cost of clothing. Strong wage growth is also a likely factor, according to the Sunday Times, which first reported on the internal analysis.

The Treasury is thought to fear that stubbornly-persistent inflation will add to the state pension bill, with the annual increase costing billions more than expected.

Treasury minister John Glen is said to be in discussions with work and pensions secretary Mel Stride about significant cuts to the benefits bill.

Sunak and Hunt have been warned to resist temptation to cut taxes

Meanwhile, the head of the highly-respected economic think tank the Institute for Fiscal Studies (IFS) has warned against tax cuts amid Britain’s “scary” public finances.

IFS director Paul Johnson pleaded for both Tories and Labour to avoid unsustainable tax cuts, warning that it could see a return to the “nasty” cycle which saw Liz Truss booted out of No 10 after six weeks following the disastrous mini-budget.

Under pressure from the right of his party, Mr Sunak is keen to cut income tax by up to 2p in the pound before the next election, according to reports.

“The nightmare scenario will be a nasty market reaction, a la Truss,” Mr Johnson told The Observer.

“But an almost equal nightmare reaction would be the Bank saying, ‘We were effectively saying that we were keeping interest rates steady, but now you’ve just injected an extra £15bn into the economy. We’re still worried about inflation and we’re going to put them up’.

The expert added: “That should weigh very heavily in any decision on tax cuts. A £15bn cut in tax this side of March – without concrete tax rises or spending cuts proposed to offset it – it would be a political and not an economic decision.”

“My plea, in a sense, is that it would be really quite helpful if [both parties] could be open about the scale of the challenges … The part we’re not going to get any honesty on, I don’t think, is on tax and spending.”

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