SerpApi.Org
Andy Burnham is a lucky man. Just as he enters 10 Downing Street with a promise to cut the cost of living, inflation has started falling faster than expected, growth has resumed and job postings are up.
But the new Prime Minister would be wise to keep the champagne on ice for now.
“The honeymoon period will be short-lived,” warns Charlotte O’Leary, an economist at the National Institute of Economic and Social Research.
Figures from the Office for National Statistics (ONS) published on Wednesday show that inflation fell to 2.6pc in the year to June, down from 2.8pc the previous month.
The drop, which was bigger than expected, means consumer prices are rising at the slowest pace since March last year.
For an economy that has for years struggled with unpleasant inflation surprises, it is certainly positive news, making it all the more painful that the good times are unlikely to last.
The fall in inflation was largely thanks to Donald Trump and Iran briefly agreeing to a peace deal in June, raising hopes that a destructive war that has pushed up oil prices was over.
“A fall in motor fuel prices, particularly diesel, helped ease inflation in June,” says Grant Fitzner, the chief economist at the ONS.
Drivers benefited from average diesel prices falling by 10.7p per litre between May and June, while petrol fell by 2.1p per litre. Prices at the pump were still 21.3pc higher than a year earlier, down from 24.6pc in May.
There was other good news for families: food price increases slowed to 1.7pc in the year to June, the lowest since August 2024. This was driven by chocolate, beer and margarine. Clothes also became cheaper in June than in May, as summer discounts kicked in.
Falling crude oil prices, meanwhile, meant raw materials became cheaper for the first time since January, and factories slowed their price rises.
For Burnham, who campaigned on bringing down living expenses when the pressures were already easing, this might seem like perfect timing.
But he may soon have a much bigger cost of living crisis on his hands, with few tools to fix it.
The Bank of England previously warned that inflation could rise to close to 4pc by the end of this year if the conflict in the Middle East drags on.
Oil has already surged to almost $95 per barrel, wiping out a temporary drop to around $70 in June, after Donald Trump’s attempts to bomb his way to peace gave way to a full return to hostilities between the US and Iran.
“The outlook is unusually hostage to events overseas,” warns Martin Beck, the chief economist at WPI Strategy.
“Inflation is likely to rise again over the next few months as earlier increases in oil and gas prices work their way through the economy and July’s 13pc rise in the household energy price cap takes effect.”
With no end in sight, the fighting in the Middle East threatens to trigger further disastrous economic effects.
Goldman Sachs said on Monday that Brent crude could spike to $120 a barrel if disruption in the Strait of Hormuz persists into the final three months of the year.
“If there is new damage to energy facilities or trouble in the Red Sea, oil and gas prices could take a further leg higher,” says Ellie Henderson, at Investec.
“In that scenario, the tolerance band for the [Bank of England’s] Monetary Policy Committee might be surpassed, resulting in higher interest rates this year,” she adds.
This spells trouble for Burnham on several fronts.
One is that the Prime Minister, who has staked all of his political capital on reducing the cost of living, will be forced to stand helplessly by as borrowing costs rise further.
Some 750,000 families who must remortgage by December were already facing average increases of £170 to their mortgage bills, the Bank of England predicted based on calculations before fighting restarted. They may now be in for a still more painful shock.
Britain’s weak job market had been showing tentative signs of recovery, but vacancies are still close to an 11-year low outside of Covid. An increase to interest rates could further dent hiring.
Another problem is the impact on the UK government’s borrowing costs, a significant millstone forecast to spend £111.2bn on debt interest for the financial year.
The resumption of hostilities has helped push up UK bond yields, which means investors now demand more than 5pc to hold 10-year gilts – up from 4.2pc before the war.
The timing could hardly be worse for John Healey, the new Chancellor. If he is to go ahead with an October Budget as rumoured, he must soon notify the Office for Budget Responsibility of his plans.
Chances are the forecaster will then factor in the higher borrowing costs into its estimates and downgrade his fiscal wriggle room.
This would leave Healey with a much smaller buffer than the £23.6bn that Rachel Reeves, his predecessor, had to spare in March.
To make matters worse, Burnham has focused his economic agenda on big-ticket spending pledges – including social care reform, boosting defence spending and cost of living freebies.
Healey may soon miss being the one accusing the Chancellor of being too tight with the purse strings.
