Forget the budget: the scars left by 11% inflation will last for years to come Martin Kettle

IBy no means can Jeremy Hunt’s fall financial statement on Thursday be treated as a budget like any other. The economic stakes for the country and the political stakes for a Conservative government after the Les Truss debacle are simply too high, too dangerous for that. Today, though, the stakes have mounted somewhat, when UK inflation rose unexpectedly sharply in the year to October, reaching 11.1%.

This is a big moment, one that resonates with the bleakest times of the twentieth century. It comes partly as the latest in a series of severe economic shocks, in the wake of Brexit, Covid and the energy crisis, that appear to be propelling Britain into a longer and deeper recession than its neighbours, which is far from over. But rising inflation is also an event in which millions of voters, with mortgages and overdrafts and needs they can’t cover, have no recent experience.

The return of high inflation signals the return of something that has haunted British politics for most of the past century. After the millennium, inflation seemed to disappear and was almost forgotten. Inflation was something your grandparents and parents talked about, like black and white movies, coal mining, or student grants. As a result, the social and political effects of high inflation are difficult to predict in a 21st century economy and democracy.

The antecedents of the twentieth century do not necessarily tell us what to expect, as it is undoubtedly a very different Britain than the last time UK inflation was at this level. It happened in October 1981, when Margaret Thatcher was Prime Minister and Rishi Sunak was one year old.

In fact, you would have to be 60 or older to have any clear memory of what inflation of this kind does to ordinary life’s fears and insecurities. As someone whose memory stretches that far, let me assure you the effect was unavoidable. The hard, unemotional struggle to maintain living standards and levels of expectations in the face of declining real incomes and shortages of goods and jobs was something that permeated every home in the country in the early 1980s. Those were very difficult times.

Hyperinflation is back now, after 40 years. Although there are some similarities, the dynamics of November 2022 are also different. Both price hikes may have followed global energy shortages – caused by oil producers in the 1970s and by oil and gas giants today. But travel trends were opposite then, when UK inflation was already falling (in May 1980, when Sunak himself was born, inflation was 21.9%), and now, when inflation is rising sharply from historically low figures.

Shopping basket
The inflation rate for food and drink in the UK is 16%. Photo: Matthew Horwood/Getty Images

The economic effects will also be different. The recent rise in inflation on a monthly basis from September was large enough to indicate a steep path that may not reach a steady level as quickly as optimists expect. Much of the increase comes from energy costs, which would have pushed inflation to nearly 14% year-on-year this time around, had it not been for the government’s price guarantee scheme. This support scheme only lasts until the end of March. We won’t know until Hunt addresses MPs how much support he plans from April onwards, but the chancellor has indicated it will be less overall from now. For many, the really hard hardship will begin at that time.

Food and beverage prices have increased by 16% over the past 12 months. This hits the poor disproportionately more than the rich, and the north of the country is harder than the south. These rates are not set to go down anytime soon, especially if the Ukraine war drags on into 2023. The history of political opinion polls suggests they will leave lasting marks.

Today’s situation also comes on top of other misfortunes. Interest rates, now at 3%, are likely to rise over the winter. The economy is already officially contracting, and if that happens again in the fourth quarter, Britain will enter a recession that the Bank of England has predicted will last until 2023 (watch out to see how the Office for Budget Responsibility forecast compares on Thursday). Hunt’s statement is expected to restore more than £50 billion in public spending cuts and tax increases. In other words, the pressure on living standards will get worse rather than better, it will be long-term rather than short-term, and it will lead to demands for higher wages – languishing at 6%, and lower in the public sector than in the private sector – further than normal.

Because, so far, we are still in the relatively early days of the full onslaught of the cost-of-living crisis. All this is very different from the situation in the early eighties. At the time, an inflation rate like 11.1% would have seemed like a multi-year relief from worse financial stress, rather than an unfamiliar shock as it is today.

How this trauma unfolds in the coming months will have profound electoral consequences. Current polls suggest the brand of the Conservative Party has been affected by the events of this year and the rollercoaster response under Boris Johnson, Truss and now Snack. Thursday’s fall statement is an attempt by Sunak and Hunt to lay out a more traditional (and therefore more credible) approach to the markets. But even if the markets agree, it does not follow that the Tories’ fortunes at the polls will now rebound in parallel.

In the early 1980s, conservatives did not pay the electoral price at the polls for inflation. Instead, Margaret Thatcher won a landslide victory in June 1983. There are many reasons for this. They include the divisions of the opposition parties (this was the era of the SPD’s break with the Labor Party), the enduring shadow of the 1970s winter of discontent under the previous Labor government, and the popularity of Britain’s victory in the Falkland War in 1982. Few if any of these apply today.

Yes, lower inflation next year, combined with lower energy prices in the winter of 2023-24, could cause some voters to feel more vindictive and less vindictive. Much depends on what is happening in Ukraine. And yes, Sunak may have decent job ratings compared to Johnson and Truss (not a high mark). Most signs, however, suggest that there was one of those episodic changes in British voting intentions, similar to those that brought Thatcher to power in 1979 and then Tony Blair to office in 1997. The Autumn Manifesto is probably relatively apt. little to the contrary.