Declining oil and food prices have seen inflation drop to 0.5 percent, its lowest level in almost fifteen years, reducing both the value of Sterling and bond yields. As the price of Brent crude continues to fall, it is likely that inflations will continue on this course, perhaps even into negative territory, if only temporarily. The slide mirrors trends across Europe, suggesting that structural weaknesses and a lack of confidence remain persistent. The mean EU rate is currently 0.4 percent, while Germany record 0.2 percent and France 0.1 percent respectively.
Chancellor George Osborne has defended Britain’s position, suggesting that “we should not confuse this welcome news for Britain’s households as a result of falling oil prices with the threat of damaging deflation that we see in the Eurozone.” However, questions remain as to whether this is good news for the British public and businesses alike.
In the short term it is unlikely that low rates will lead to a deflationary spiral and there are no suggestions that consumers will put off high value purchases as a result of these figures. Similarly, when coupled with falling fuel prices low rates may prompt a boom in spending amongst middle income households who’s spending has been constricted in recent years. Certainly Mark Carney, Governor of the Bank of England, sees this as a likely outcome, having suggested that the figures represent “good news for British households — they can stretch their pounds further.” With consumer spending falling last year, this will be well received by businesses, particularly on the high street. A note of caution has come from Francis Grady of the TUC who, correctly, suggests that even with wages rising and inflation at minimal levels it will take years for real wages to return to their 2008 peak. This surely offers an opportunity for Labour in particular to make political hay, if of course they spot it.
What this situation means for interest rates is unclear. The Bank of England remains resolute in its belief that inflation will return to its 2 percent target by the end of their two year policy horizon. If wages rise, as they did in Q4 2014, it is possible that rate rises may be considered. Certainly Mark Carney’s suggestion that rates would “move up over the course of the next couple of years” points in this direction. It is notable that economists from J. P. Morgan and Investec have warned that rates will need to rise in Q4 2015 to stave off any deflationary risk and caution will be needed, particularly if the situation in the Eurozone deteriorates, dragging Britain into a disaster driven by low confidence.
Any future Government are also likely to have one eye on the impact of inflation on Britain’s debt. A lower figure will not only make repayment a slower and more painful process, but is likely to hinder the funds available to the state through tax returns. Again, this is not a pressing matter in the immediacy, but it could well become one if the wrong measures are taken. In the short term the Chancellor will no doubt be hoping that low fuel and food prices will help give his economic vision the credibility needed to ensure that he continues to hold the keys to Number 11 on May 8.
Arresting the Slide: Why Labour Should be Concerned About the Latest Ashcroft Poll
The first Ashcroft National Poll of 2015 was published this week with an unexpected result: the Tories seemingly taking a six point lead over Labour, by 34 to 28 percent. Meanwhile, UKIP fell three points to 16 percent and the Lib Dems remained neck and neck with the Greens on 8 percent.
It is vital to keep these results in perspective and, given their 3 percent margin of error, it is possible that the Conservative share could still be low enough, and the Labour score high enough, for the parties to be tied on 31 percent. However, the results can also be seen as the start of a move towards the Tories as the election looms large on the horizon.
Certainly, as the graph below demonstrates, this seems to be the case.
Over the past two years Labour have held a consistent lead over the Conservatives, generally of around 2-4 points and yet this has narrowed in recent months, in tandem with improving economic fortunes. According to Lord Ashcroft’s research 77 percent felt that a recovery was underway – regardless of whether they personally were benefitting from it. Meanwhile, under a quarter of voters (23 percent) felt that the economy was still not recovering from the recession. Given that the Tories message relies on people feeling positive about the country’s economic prospects these trends bode well for their strategy.
The volatility of polls should not be underestimated: only this week Populus suggested that Labour hold a five point lead (37 to 32 percent), with the Greens as low are 4 percent following online polling. Whether the anonymity of the internet lends itself to voters revealing their true selves remains to be seen, but the stark picture painted in the Ashcroft data, coupled with the narrowing gap in the poll-of-polls above, suggest that Labour need to adopt a new approach if they are to arrest their slide. Though they will be heartened by ComRes’ suggestion that the NHS is a ‘major issue’ for 50 percent of voters, they have yet to define their direction on matters pertaining to economic growth or immigration, matters that remain salient.
This was originally published last Friday in Whitehall Weekly. You can subscribe here.
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