Coffee House Shots
Why has the inflation rate gone up again?
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It should be so that this was widely anticipated. In the last minutes from the Bank of England, when they did that first interest rate cut, small, slow, but still a major moment, you know, they noted that by the end of the year they expect inflation to rise slightly, just under 3%. Nothing like what we saw during the inflation crisis. And the inflation rate is going to be in slight flux. That's okay. Their forecast suggests that it will actually fall under target slightly in the years to come. Now, of course, we don't know what is to come. There could be another shock. Anything could happen. We live in a state of prima crisis for sure. You know, this was expected. So this isn't a terrible shock. And I don't think it changes much. Now, a lot of forecasters have been saying the Bank of England is still being hawkish. They were able to do a small interest rate cut because they've been so tight with monetary policy. It's still tight. Don't expect in their September meeting for them to do another interest rate cut. They're going to wait and see how this all pans out. But I think things are still pretty much on track. I mean, I think what's crucial here is that the services rate of inflation, which has been really sticky, slowed from 5.7% in the year to June to 5.2% in July. I mean, that's still more than double the headline rate. But that is some meaningful progress. And that we know that that is one of the numbers that the Bank has been looking at very closely when it's been deciding whether or not to cut rates. So I think you still actually, this morning, if you dug into the data, saw a pretty good news story. I don't think there's any reason to panic. And everyone was expecting a small uptick at some point. Yeah. And I think there were some reports suggesting that it was going to be 2.4, 2.5, rather than the figure out today. So it doesn't seem to be causing much ripples. I mean, it's very interesting, of course, how seismic and important totemic that was to the Rishi-Sunak government. They really bet the whole house on sort of 2% inflation, even though, of course, it was a voteless recovery to use the American phrase. So we don't expect anything in terms of the political reaction over there. But I think it's interesting kind of the small, it's such a small uptick, interesting kind of looking at some of the reporting around things, how even the impact of Taylor Swift's concerts last month expected to have pushed up hotel accommodation in June. So the rise and rise of the irrepressible Taylor Swift, and Swiftenomics is something to watch as well. And then I suppose the other thing of course is about energy prices as well. And this was the big bet that the Sunak government was that energy would fall rapidly, energy costs, which it did through 2023. But obviously, the slowdown in those costs mean that we've had partly for this rise in inflation today. And Kate, this is part of a bigger sort of influx of economic data that we're going to get ahead of the budget in 77 days time. Can you take us through the timeline and perhaps maybe what we should look out for? Well, we're going to get a lot more information about what actually happened to growth in Q2. By the time we get to the budget, we have a GDP update, monthly update tomorrow, we're going to have several more before the budget. And I think this is going to tell a quiet, slightly positive news story. I mean, I'm really cautious here to kind of paint. This is great news. Let's be honest, growth has been pretty stagnant and even something better than expected is even if we got 1% growth, which would be better than expected in this fiscal year, still not much to write home about. But what was always going to be true is that these updates we were getting were likely to show a slightly more positive news story. It's now clear that the forecast made at the start of the year in the US were way too optimistic and America is reeling from that at the moment. And it's also clear that in the UK, they were too pessimistic. And this is often the case. Bodies like the IMF very often underestimate and then revise upward. UK growth. So I think, you know, Rachel Reeves may have a little more fiscal headroom to play with than Jeremy Hunt thought he was going to have in the autumn. Does that mean that we should expect mass tax cuts? No, no, we should not. We're expecting tax rises. Does that mean that they're going to turn on the spending taps? It'll be interesting to see if there are changes to the fiscal rules, which could allow for more borrowing. That's again, they're very slightly different from saying, actually, we have all this money we can spend that saying we have slightly more scope to borrow and hike the national debt further of a really different, really different prospect. But no, we are going to get a few more updates. And I think they're going to be relatively good news stories. It was interesting, the quote put out by Darren Jones this morning, the chief secretary to the Treasury saying about this small uptick in inflation, you know, once again, I'm paraphrasing here, we know what we've inherited from the previous government. When you think about what the previous prime minister inherited, when Rachel C. Nacht took over, inflation was in double digits. I think James is completely right to point out that this inflation was such a major part of the C-NAC government and getting that under control. And just as it came under control, we have had a change in government. You know, that small uptick, this is not threatening to the labor government. This is not do or die by any stretch of the imagination. But it is, that part of the statement just kind of made me reflect on the fact that this inflation inheritance is really very good for the labor government, especially compared to what came before. And talking about labor's inheritance, we've also heard a lot about the fiscal black hole and labor's attempts to fill it. Have we got any news on sort of departmental cuts that might be going on, James? Yeah, so our celebration comes to hangover. And I think right now, there's been an initial kind of collective side of relief in Whitehall at this new government. I think, you know, you wouldn't have found many civil servants who were sort of too much cheering on the Tories like the rest of the country when it came to polling day. And so I think there was a sense of, right, we have a government that sort of believes in the civil service. Now the reality comes, of course, all eyes are on the spending review, which is due to be held in October. And that's going to be key. So already this week, Darren Jones, Rachel Reeve's deputy has kicked that off, writing to all departments, saying they'll need to make efficiency savings. The idea is sort of 2% back office costs. So that will involve making decisions about where to prioritise team and resources. I think we can expect in the coming months to have that working alongside the attempts to kind of launch the missions off the ground, the five missions that Starmer announced last year, and to boost various outcomes like growth, for instance, and economic opportunities. So I think that that's going to be a kind of key function. And talking to people this week from my political column, there's been a lot of focus behind the scenes on this. The danger is, of course, is that if you try and say that you're dictated by these five governing missions, you either get the Treasury intervening, which has been some traditional graveyard of so many post-war ambitious labour schemes, or you get events. And of course, Starmer's first four weeks in office, we've seen massive focus on foreign affairs, which perhaps wasn't something that Prime Minister prefers incremental reform and change would necessarily have welcomed, of course, the riots as well. So there's a lot of happening in the Whitehall right now in terms of looking at the spending review and the finances for that, and I'm sure we'll have lots of kind of headlines about how awful it would be to cut certain things, et cetera, et cetera. But also at the same time, there's interesting kind of shifts in personnel happening, and sort of labour tries to get its government really off the ground with the missions. And we've also got the Treasury under scrutiny at the moment after a Labour donor received top civil service job. We haven't really covered this on coffee house shots yet, but James, could you maybe take us through it? Yeah, so this is the appointment of a Labour donor to a Treasury role, basically, which the Ian Corfield, former banker, was a senior business advisor to the Labour and Opposition, donated around £20,000 to Labour politicians in the right of the election, and thereafter he's now been appointed as Director of Investment to the Treasury. This post is usually reserved for senior civil servants. I had lots of clocking Tories saying, outrageous, you know, we'd never pointed someone like this before. And this comes out of the question of who you bring into government political appointees. Some of those have been welcomed in Westminster and Whitehall, like James Simpson, who's the new Justice Minister, seen by civil servants, by politicians, by the wider public, as a sign that Labour's serious about Mr Justice reform, penal reform. But then others like this one were involved, where money's involved, that's the real danger, I think, for Labour. Now you've got people like George Osborne coming out and saying this is ridiculous, the Tory should shut up. Actually, you know, he's a senior bank, he's got good experience, and it's important to have that as part of the Treasury. But already there's a question of processes, and today the later development is that the Treasury failed to tell, failed to get the approval for the appointment from the Civil Service Commission regulator. And I think it's one of those things where they were getting into government for a long time opposition, a lot of things happened in that. And it's one thing to say, you'll be all sparkly new and shiny in opposition, and the realities of power and the poor you choose to bring in with you can prove that to be quite another. You know, I don't often advocate for many American imports, especially when it comes to US politics at the moment, coming to the UK. I wrote a piece earlier this year about why we should not be importing the US desire at the moment to prosecute your political opponents, for example. But I do think there's sometimes something slightly more honest in the US system about political appointees, and exactly what roles and who is a political appointee. There's nothing fundamentally wrong with political appointees with being honest about the fact that you've got jobs, do you've got limited time to do it, you want to bring in people with, you know, really good experience for the role as you envision it. It's not to say that they should be replacing the Civil Service. There's a very important role for the neutrality there too. But I think I think sometimes there's a desperation almost to hold on to this idea of neutrality when we feel like, well, perhaps that actually isn't the right role for neutrality. Perhaps that's not what's actually taking place. I just think there could be like a little more flexibility and honesty around these roles and who is actually sitting in them. If it is going to be a bit more political, if it is going to be someone who's directly associated with the Labour or Tory party, let's say, and you know, there could be merit in switching that up a bit anyway, and just being a little more honest about who you're putting into the role. Great. Thank you, Kate. Thank you, James. And thank you very much for listening. And if you do enjoy the podcast and you're listening on Spotify or Apple podcasts, please do give us a follow. [Music]