Rare bright spot for Rishi Sunak as UK inflation tumbles

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Good evening.

UK Prime Minister Rishi Sunak received some much-needed good news this morning as official data showed inflation falling more than expected, triggering expectations of an interest rate cut in the spring, albeit balanced elsewhere with more warnings about the fragility of the economy and the lingering damage from Brexit.

Inflation fell from 4.6 per cent to 3.9 per cent in November, dragged down by fuel and food prices, to hit its lowest level since September 2021. The core measure, excluding those volatile items, also fell from 5.7 per cent to 5.1 per cent. The data prompted a fall in the pound and a rise in UK stocks. 

Markets are now pricing in a quarter-point rate cut in May. The Bank of England voted earlier this month to keep rates unchanged at 5.25 per cent over concerns that UK inflation was proving more stubborn than expected and higher than in the US and the eurozone.

Although this morning’s data will give some relief to the prime minister, who has made halving inflation by the end of the year one of his five core promises to voters, it comes after a torrid few days of bad news. 

Yesterday, he was reprimanded by the UK statistics watchdog for erroneously claiming that “debt is falling” — another of his pledges.

Also yesterday, Pimco, one of the world’s biggest active bond fund managers, said the UK was at high risk of a serious economic downturn next year. 

A new post-Brexit assessment of trading conditions meanwhile has highlighted the mounting costs facing British businesses that export to the EU.

The British Chambers of Commerce said companies were mired in so much red tape from new EU rules that it was easier to trade with more distant countries and that upcoming changes would have “big repercussions” that the government could not ignore if it wanted to deliver economic growth. On the plus side, the government has at least reached a post-Brexit financial services deal with Switzerland.

Economic challenges aside, Sunak’s political problems continue to mount. 

Junior doctors in England and Wales today began another three days of strike action (affecting one of Sunak’s other pledges to cut hospital waiting lists) while it was confirmed that his government would face yet another difficult parliamentary by-election after voters signed a petition to remove Conservative MP Peter Bone.

English councils are also in uproar, arguing that a new funding offer from central government means they will have to raise taxes and cut essential services to avoid bankruptcy.

However, the biggest problem for Sunak ahead of next year’s general election, argues Inside Politics writer Stephen Bush, is that the prime minister has gambled and lost on his “five pledges” strategy, and is likely to meet just one of them. His party, Bush suggests, will now switch to Plan B: attacking the Labour opposition’s spending plans.

This is the last Disrupted Times until the new year. The next edition will be in your inbox on Wednesday January 3. Season’s greetings to all our subscribers.

Need to know: UK and Europe economy

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Source: Economy - ft.com