Inflation pain: who will UK voters blame?

This is an audio transcript of the Political Fix podcast episode: ‘Inflation pain: who will UK voters blame?’

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Claer Barrett
It can just make people think, I can’t bear to deal with this. It’s just too emotionally upsetting for me. I’m gonna bury my head in the sand, and that is the worst thing that you can do.

Lucy Fisher
Welcome to Political Fix, your essential insider guide to Westminster from the Financial Times with me, Lucy Fisher. You heard there the FT’s consumer editor, Claer Barrett, talking about the one subject in town this week: inflation and interest rates. We’ll examine whether high inflation is wrecking Rishi Sunak’s hopes of re-election. Plus, is it fair that the Bank of England is under fire? And what levers does the government actually have to tame inflation? Joining me in the studio today are FT columnist Stephen Bush. Hi, Stephen.

Stephen Bush
Hi.

Lucy Fisher
And political editor George Parker. Hi, George.

George Parker
Hi, Lucy.

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Lucy Fisher
So to kick us off this week, Stephen, what stopped you in your tracks?

Stephen Bush
Yeah. Outside of the huge story of the economy, I think for me my favourite moment was poring over the division lists after the vote on Boris Johnson’s future in the Privileges Committee. Obviously, we expected all of the opposition parties voted to hold it up. But the more interesting thing were the 100 or so Conservative MPs. And what that tells you about the, you know, the strength of the various factions within the Conservative party. This is always useful when a party is forced to give us a nice, new, fresh mental map of its divisions. And it was kind of fascinating watching these anti-Boris groups, so retiring MPs with nothing to lose. There are some Conservative MPs who are basically Conservatives because they literally own most of the land, you know, kind of the real bedrock of the party. And one of the significant moments in his downfall was those MPs in particular coming out and going, no, no, you’ve got to go. I thought it was a fascinating moment to see who decided, actually, no, I’m gonna come out. Partly it was, of course, just the left of the party, but partly, of course, it was people who have had a lot to fear for the Lib Dems in their own patch. And it was kind of interesting to look through and go, oh, right. So thinking about the next leadership election, you know, who’s coming back, who has a fighting chance of making the ballot of members. It was just a yeah, a fun, fun afternoon with the division lists.

George Parker
Well, I would also say it was interesting that there was a division, wasn’t it? Because a lot of people said that it was gonna be knotted through. But in the end, the Labour party conspired to force a vote. Now, I think Stephen is such a nerd that he understands how this happened. What is the procedure by which you can force a vote even if you don’t necessarily want to oppose something?

Stephen Bush
Well, you just have to shout no for a loud and long enough period that the speaker at their discretion goes, OK, right. There’s clear opposition. Now, the fun historical point here is that one of the reasons why you can force the division even if you intend to vote with the motion is that the origin of parliamentary divisions goes back to Thomas Cromwell and Henry VIII’s attempt to divest himself of his first wife, and they used divisions as a way of smoking out opponents, right, so they could visibly see who had voted against the king. So when they next were going to go to one Thomas Cromwell could go around working out how to return people who would be pro his measures and pro-Henry VIII’s measures. So one of the things I found slightly amusing about various Conservatives sort of confidently saying, oh, we’ll avoid the division is that, well, that’s not in your gift. The opposition has always been able to when it wants to embarrass the government of the day by forcing a vote, has always been able to go, no, no, no, I think we’ll have a division.

George Parker
And that’s basically what the Labour whips were doing. They were employing the same tactics as Thomas Cromwell to basically flush out people who were prepared to actually go on the record to support Boris Johnson. Then in the end there were seven of them, weren’t there . . . 

Stephen Bush
Yeah.

George Parker
 . . . who basically fell into Labour’s trap advertising how thin the support was for Boris Johnson in parliament. Of course he has much broader support out in the country and in the press, but in parliament it was really striking how few people there were. I mean, just on that, my favourite moment, of the week was this great moment where Harriet Harman, who chaired the Privileges Committee inquiry into Boris Johnson, was being attacked by Jacob Rees-Mogg, a big ultra Boris Johnson loyalist, for the idea she was biased because she’d previously spoken out against Boris Johnson. And she revealed that she’d actually mentioned this to the government in advance and the government, Boris Johnson’s government, basically said, no, fine, go ahead and chair the inquiry. And that actually (laughs) was a quite an easy moment for Jacob Rees-Mogg to sit down under and suck it up, I’m afraid.

Lucy Fisher
Yes. And for me, something a little bit different. I was really struck by a speech that David Lammy gave on Tuesday, setting out a vision for Labour’s foreign policy if they win the next election. And it’s interesting that they are trying to place economic diplomacy at the heart of UK foreign policy, stealing a march on the government. But I thought there were some interesting ideas there from Lammy, including reviewing where Britain has its postings for diplomats. He talked about shifting some to countries like India that are crucial to Britain’s prosperity and supply chains, and also looking at convening a new business council, which seems a bit of a byword for Labour at the moment, to advise on foreign policy. And when you come to think about it, maybe a little bit of a trick miss that the government doesn’t have more economic input.

George Parker
It’s interesting that when William Hague was foreign secretary, he came up with exactly the same approach, actually, that we need to make all our diplomats basically salespeople for Britain. So he’s going back to a Hague-ian, I think.

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Lucy Fisher
Well, let’s move on to the main theme of the week then, which is how much pain the Bank of England’s latest rate rise will inflict. So we are very lucky this week, we’ve got two of the FT’s top experts to talk us through this all. Chris Giles, the FT’s economics editor who’ll talk to us about the pure economics, and the FT’s consumer editor, Claer Barrett, who will talk to us about our finances. So first to you, Chris. Hi.

Chris Giles
Hello.

Lucy Fisher
So, Chris, it’s been really busy week for you. On Thursday we had that interest rate rise from 4.5 per cent to 5 per cent. Give us a bit of the general context of what’s coming next. Lots of talk of interest rates reaching 6 per cent by the end of this year, lots of talk of recession now being all but inevitable.

Chris Giles
Well, certainly the Bank of England didn’t do anything at all on Thursday to damp speculation of further interest rate rises to come. So they could have put something in the statement. Officials could have quietly told us we were locked in a room three floors underground and they can quietly say, well, this is what we really are trying to say here. None of that at all. So they’re not saying it will go to six, interest rates, but they’re not trying to say anything other than the data that we’ve seen since they last met in May has all been pretty terrible on inflation and on wages. And so they’re gonna take a big action now and wait and see. And the data continues being bad. It will go up to those sorts of levels. Could go further than that. I mean, that’s been the experience of the last year or so. But if things start looking better over the summer or the early autumn, then it is not a done deal, it’s not definitively going that far.

Lucy Fisher
What about the Bank of England and Andrew Bailey, as governor, coming under increasing fire now for saying Bailey as recently as last year that inflation was looking to be transient as recently as March, saying that he was expecting a sharp fall in inflation, which has in fact proven pretty sticky. Is it fair for the bank and Bailey to come under criticism?

Chris Giles
Yes, I think it’s always fair for public officials who have very important jobs to face scrutiny and I think Bailey sometimes has given the impression that he doesn’t think it’s fair. I think the criticism has to be done properly. So you have to acknowledge that lots of things have happened which had nothing to do with the bank. Vladimir Putin invading Ukraine, having an effect on food and energy prices. The bank couldn’t stop that. And so part of the inflation is clearly out of the bank’s control. But I think it is completely fair to say that the bank has been behind the curve, has always expected inflation not to be as bad as they thought. And over the past four months, every month time in, time out, they have got their forecasts of inflation wrong. And these are medium-term forecasts. These are what’s happening in the shops right now . . . 

Lucy Fisher
Mm-hmm.

Chris Giles
 . . . which is where they have hundreds of people who are looking at this and they really should get that sort of stuff right. So I think it’s fair to be reasonably critical of the bank. And I think sometimes Andrew Bailey showing a little bit of a thin skin like in the press conference in May where he started complaining that journalists were using the language of blame, which they’re journalists, they always used the language of blame (both laugh).

Lucy Fisher
It’s our currency.

Chris Giles
We love it! And it showed a little bit of tetchiness, when it was obvious people were going to say, you need to defend your record. And I think the bank has a reasonable defence, but it just has to get out there and say things maybe a bit more clearly. Maybe accept it’s made mistakes ’cause often they don’t like suggesting they make mistakes. And I think one of the really important things the government in 1997 gave the Bank of England the task of controlling inflation on the grounds that public officials who don’t have to face electorates would be more willing to be really straight with the public.

Lucy Fisher
Mm-hmm.

Chris Giles
And quite often you feel the Bank of England is actually sounding rather like politicians always trying to defend themselves, cover their back, saying it wasn’t our fault. It’d be much better if they said, look, these are mistakes with hindsight we now think we’ve made and this is what we’re doing about it. And I think the bank would be wise to go a bit more in that direction.

Lucy Fisher
And just finally, Chris, obviously, Rishi Sunak at the beginning of the year set out as his first of the five priority pledges that he would halve inflation. I mean, was that completely irresponsible? Does he have any levers in his power to actually achieve that? And is it looking likely that it will halve by . . . 

Chris Giles
He never really had. Well, he has some he believes he could raise taxes lots.

Lucy Fisher
Yes.

Chris Giles
So induce a slowdown, which he doesn’t want to do. But I suppose what we thought in January when the pledge was made was that there was pretty much no chance of it being missed. And this is not just the Bank of England forecasts suggesting that but pretty much everyone’s forecasts. We all thought inflation would come down faster than it has done. So there was a lot of jokes. I mean, it’s like someone at high tide predicting that the sea will move away and then trying to claim credit for it when it happens. Now is looking much more dicey. It’s not definitively going to be missed by the end of the year, but it’s looking much, much closer because to meet the target and the Treasury has maybe stupidly, in the Budget, defined the target really quite precisely. It means an inflation rate of 5.4 per cent in the fourth quarter of this year. They’ve already used up 3.6 percentage points of that 5.4. So inflation has to halve in the second half of the year. The rate at compared with the first half of the year. And that’s looking a little bit tricky now.

Lucy Fisher
Chris Giles, the FT’s economics editor, thanks for joining us.

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We’re joined now by Claer Barrett, who of course writes the weekly Serious Money column and presents the FT’s Money Clinic podcast. Hi, Claer.

Claer Barrett
Thanks for having me.

Lucy Fisher
So give us a bit of context. How many people are affected in terms of having to refix their mortgage or suffering the rate rises at the moment in the UK?

Claer Barrett
Well, between now and the end of the year, about 800,000 borrowers are gonna roll off fixed-rate deals, according to UK Finance, which is the banking trade body. And the year after, over a million more will add to their ranks. And this is a process that’s speeding up. We’re seeing more and more people come to the end of these fixed-rate deals. And of course, this is where the pain of interest rate rises is very unfairly felt. It’s quite highly concentrated on people who are younger with bigger loans, who, of course, bought as property prices spiralled higher.

I mean, my goodness, if you’re a first-time buyer who bought two years ago when the stamp duty holiday was on, you’ve had a baby since then and you’ve got childcare costs to add to the mix. That’s really, really gonna stretch your budget. Then you’ve got older people who may have paid off more of their loans, so there’s less to go. But then an awful lot of people who aren’t gonna be affected by this at all because they’ve paid off their mortgages. And that is the traditional rump of older voters that the Conservative party are often accused of pandering to. Rates could get to much, much higher levels, and that wouldn’t crimp their spending power . . . 

Lucy Fisher
Mm-hmm.

Claer Barrett
. . . which perhaps helps to explain why it’s taken so long for the Bank of England’s rate rises to be effective and the supersized rate rise that we’ve seen on Thursday.

Lucy Fisher
As the Labour party like to talk about an average what they call Tory mortgage penalty of £2,900 this year. Is that a fair way of looking at the rise that many people are facing?

Claer Barrett
I’m very anti averages being used for the simple reason that it panics people.

Lucy Fisher
Mm-hmm.

Claer Barrett
Now I’m in the job of trying to calm people down at the moment when it comes to their mortgages. Everyone’s individual situation is different. A lot of these average jumps are based on what the best possible rate would have been a few years ago compared to the worst possible rate now — the standard variable rate that lenders will default you on to when your loan ends. And in fact, it’s those kinds of figures that were often quoted in the letters that mortgage lenders send out, really to sort of shock people into action. But knowing the human psyche as I do, it can just make people think I can’t bear to deal with this, it’s just too emotionally upsetting for me. I’m gonna bury my head in the sand. And that is the worst thing that you can do when faced with these big shocks to your budget.

The message from everyone has been very clear. People need to talk to their lenders if they think they are gonna face financial difficulty and the hard thing is, is that so many of these people, they would never have been in any financial difficulty before in their lives ever at all. They would never have been behind on a bill. People are incredibly worried about the impact on their credit scores. If you phone up and just talk to your mortgage lender, your credit score is not gonna be affected. But the solutions that they’re then going to offer you, obviously, that’s gonna take some time to digest. And if I had been in the meetings that the chancellor’s been having in recent days with the money experts and mortgage lenders taking the temperature of the market, I would say to him, please make sure that debt advice, free debt advice in this country is properly funded, because I think that the demand for it is gonna be unprecedented and that debt advisers are going to need to work in tandem often with mortgage lenders just to help people understand properly what the options are available to them. Of course, for lots of people, these are gonna be difficult, life-changing decisions. But scaring people with average numbers could be counterproductive.

Lucy Fisher
Well, some great advice there for both mortgage holders and the chancellor. Now, we know that Rishi Sunak and Jeremy Hunt have ruled out direct help but beyond, say, funding more debt advice, what else could they do to help people with mortgages?

Claer Barrett
So they’re passing the buck to the mortgage lenders who have agreed that they will offer forbearance to borrowers. That could come in many forms. And the lenders have said, it will depend on your individual circumstances. They could let you go interest-only for a period. They could extend the term of your loan or they could allow you to build up arrears on your mortgage. So with their agreement, you’re allowed to pay a reduced rate, but those debts will be added on and of course, that will affect your credit score.

What I can foresee happening is different lenders offering different solutions to different customers, and I am concerned that there isn’t going to be as level a playing field or as transparent as a playing field as there needs to be. And that’s been picked up by some of the comments that shadow chancellor has been making in the House of Commons.

Now, at the moment, if your bank makes a decision that you’re not happy with, you can go to the Financial Ombudsman once you’ve exhausted the bank’s internal complaints process. But the Financial Ombudsman is overloaded with complaints at the moment. It could take six months, nine months for the time that your case is actually allocated to an investigator. And if we’re talking about mortgages, potential house repossessions, let’s not mince our words here — time is of the essence. We really need a quick decision and a quick process of appeal. If you think that the lenders have not treated you fairly — and I think we need to have public confidence that that system is working. But we need to make sure that there’s a fair process for how we treat borrowers.

And the other big thing, Lucy, is don’t forget renters have been banging on all of this week. You know, renters are really hurting too as landlords put prices up. Now, one thing that the government does have within its gift is looking at the level of local housing allowance, which sets the level of help that those on benefits who are renting privately will receive towards their rent. Rents are shooting up, but that local housing allowance has been frozen since 2020 and there are millions more people who are renting in the private sector won’t qualify for these benefits, but nevertheless are really worrying what their landlord’s gonna do next and if there will be an exodus indeed of landlords from the sector.

So the longer-term solution to all of this has got to be more housing for affordable rent, not shared ownership, not these Help to Buy models that encourage people to build up unsustainable levels of debt, but either funding councils to build housing, housing associations, or creating the conditions for a professional renter sector like we see in big European countries like Germany to really thrive in the UK. We need to let go of this idea that you have to own your house. A sustainable model for renting would be much better.

Lucy Fisher
My thanks there to Chris and to Claer. And for anyone worried about their mortgage, Claer’s next episode of her podcast FT Money Clinic has put together a really handy practical guide, so I’d recommend tuning in to that.

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Lucy Fisher
George, Stephen, thanks for staying with me there. So, George, beyond just the diceyness, as Chris put it, of Rishi Sunak potentially breaking his pledge to halve inflation, is this just a disaster for the Conservatives electorally, isn’t it?

George Parker
Yes, it is and I think first of all, important thing to say about this target that he set himself of halving inflation to 5.4 per cent as Chris said. This is only Rishi Sunak setting and marking his own homework. You know, I think it’s important to say that the tests on which he will judge himself are not necessarily the tests upon which the electorate will judge Rishi Sunak. So getting inflation down to 5.4 per cent might be quite a significant achievement given where we are now but what the voters won’t necessarily be thankful if, as Claer was describing very eloquently there, they’re coming off fixed-term mortgages and suddenly being hit by increase in their monthly payments of two, three, £400 or whatever. And the problem is it’s a slow-motion problem for the Tories. “Mortgage bomb”, as Sir Jake Berry, a Tory MP, described it sort of detonating in election year. And, you know, it’s very much not the economic backdrop that the Conservatives imagined they would, could be fighting the election on as we go into the start of 2024 election year. It’s possible, though not certain by any means, that we could be in a recession. Inflation rates and the cost of living is still a massive problem. Mortgage rates still extremely high and then if you chuck into all that, the Boris Johnson problem, as we were discussing earlier, the fact the public services aren’t working very well. I was saying to one Labour MP today, you’d have to be a pretty useless opposition not to be able to win from this position. This MP said, well, we’ll give it a go.

Lucy Fisher
(Laughter) So Stephen, let’s look at that then. So Keir Starmer went on this issue at PMQs. He said that the, what he calls the Tory mortgage penalty is a direct result of the kamikaze budget of Liz Truss and Kwasi Kwarteng last autumn. At the same time, Rishi Sunak’s trying to say, look, yes, inflation is stubbornly high in the UK, but it’s also pretty high in the US and the eurozone. What do you think voters are gonna buy?

Stephen Bush
I think one of the reasons why the Liz Truss era was so damaging politically was then essentially if you’re looking at the polls and also when you go around the country sort of bothering people about how they’re gonna vote, I think it’s pretty clear that up until the Kwasi Kwarteng budget, people when we have a problem of inflation, we see that there are global factors and essentially Liz Truss’s signal achievement was to make the Conservatives the owners of the UK’s inflation problem. Now some of that is fair, right? Brexit undoubtedly has heightened some of our inflationary problems, but broadly speaking, most of the pain households are feeling is not about anything the Conservatives have done. But I think, when you look at the polls, when you talk to people — I was sitting in a focus group yesterday — it’s pretty clear that people buy the Labour line and it’s the Conservatives’ fault. And I think one of the problems is because Rishi Sunak felt so constrained about his ability to take on his own right flank, he’s never really, OK, he’s done a lot of coded things that we will pick up on as a sort of coded rebuke of the Truss era. But if you think about the average person who doesn’t follow politics that closely, there has never really been a big moment in which he’s gone, that was the result of things in the past, I’m moving beyond that. And actually, I think one of the most powerful images in the next election will not be a poster designed by any of the political parties, but that shareable graphic, and I’m sure all of our listeners saw it at some point during the Truss administration, which is the Kamikwasi, he loves a good crash, which went round WhatsApp like wildfire. And I heard about that image more than anything else when I was knocking on doors in the local elections, testing the mood. And I suspect that will be the case right the way until the election, whenever it is.

George Parker
Mmm.

Lucy Fisher
Yeah, And George, I mean, is this in some ways a rod that the Conservatives have made for their own back in terms of the way they have primed public expectation for the government to step in? Firstly, in the pandemic with furlough and fine, you might say that’s a sort of unprecedented crisis. But then we had Ukraine and then the very expensive energy support scheme for bills. Is it any surprise now that not only the public but many of their own backbenchers are demanding that the government step in to help mortgage holders?

George Parker
I think that that has become inevitable. I don’t think we should criticise the government, of course, for stepping in with the furlough scheme or the energy support packages because they were essential, but you’re right that you end up in a situation where Conservative MPs, including some on the right of the Conservative party, who simultaneously are calling for tax cuts and massive state interventions to help mortgage holders. But in this case, you know, you can sense the frustration in Number 10 and Number 11 Downing Street about this. You know, you speak to aides who say, look, we’re not in a pandemic now; we can’t always intervene. And the thing is, if they were to intervene to avert hardship for mortgage-holders, for lots of different reasons, it would be a mad thing to do. It would be unfair to the renters that Claire was talking about earlier and people who don’t own homes, obviously massively regressive, but above all else, entirely counterproductive. You’ve got the Bank of England with its foot on the brake trying to slow the economy down for the idea that the government would then be chucking money at householders — the equivalent of putting your foot on the accelerator. It would just be absolute madness economically. So they’re not going to do it. But that doesn’t mean that opposition parties, including the Liberal Democrats, will be saying that’s exactly the sort of thing they should be doing.

Lucy Fisher
Mm-hmm. But I am interested, Stephen, with the Labour party, Rachel Reeves this week brought forward her five-point mortgage relief help plan, but it’s basically the same as what the Financial Conduct Authority is already telling lenders that they have to do: offer mortgages to switch to interest-only terms or to lengthen the length of mortgages to help people. So does Labour really have any good answers on how to tame inflation itself?

Stephen Bush
Oh, no. I mean, ultimately the Labour party’s actual inflation strategy is hopefully we will have hit the peak by the time of the next election and then the Labour party will be able to benefit from the pain working its way through the system. And in some ways, right, but whatever one says about the Bank of England’s shortcomings and, you know, Chris’s points were all very well made, is that broadly speaking, we see from both what the Labour party and the Liberal Democrats are saying and the noises off from the backbenches and the fact I think it is still likely that the Conservatives will find some pretext to cut taxes, then broadly speaking, the one bit of our economic armoury that is actually willing to commit to doing this to fix this problem is the central bank. So we are seeing one of the arguments for central bank independence playing itself out.

Lucy Fisher
And George, recession: what do we think? Is that likely?

George Parker
I think it’s possible. It’s not a certainty by any means, but you heard the Bank of England governor Andrew Bailey saying it’s not trying to force a recession, but he’ll do whatever it takes to control inflation, the implication being a recession, if necessary. And Jeremy Hunt, the chancellor’s acknowledged it might be necessary as well. Now, this is, in a way, a sort of technical debate. People don’t necessarily know whether the economy’s growing by 0.1 per cent or is contracting by 0.1 per cent over two quarters. They know about it because they’ll feel it in their weekly budgets and in their shopping bills and in their mortgage payments. But I think it’s entirely possible. But it just feeds into Stephen was just saying there is this idea that the Conservatives have crashed the economy. If the R-word is out there in the media every week for several months, running into an election year just adds to the sense that something’s gone terribly wrong.

Lucy Fisher
More gloom ahead, quite possibly. Well, let’s end on a more cheerful note, shall we? Stephen, what have you been up to this week? What are you looking forward to this weekend?

Stephen Bush
So what have I been up to this week? It’s probably shouldn’t surprise people, considering what I said earlier, but I’ve been rereading — apologies to all our listeners in Scotland for the botch job I am about to do of the pronunciation here — the MacCulloch biography of Thomas Cromwell. It’s a really great book, really interesting. Yeah, I mean, biographies from that period are just better because people have the decency to die at the end of their careers, whereas (Lucy laughs) now, you know, they go on and on. But yeah, really enjoying that. What are you looking forward to?

Lucy Fisher
Well, I mean, I’m actually off to ride this weekend for the Peasmarsh Chamber Music Festival, so I’m really looking forward to hearing some Stravinsky and Mendelssohn. George, how about you?

George Parker
Well, I think Robert mentioned this previously. He was going to see Dear England, which is the new James Graham play at the National Theatre, which is all about Gareth Southgate. It’s a brilliant play, probably slightly overlong, I would say, a little bit clunky in places, but nevertheless Joseph Fiennes is brilliant as Southgate and it’s basically a story about how Southgate reinvents the England team and the whole culture around the England team. And of course that’s a broader allegory for reinventing the nation as a whole and becoming a slightly nicer place, which is concerned about free school meals and racial harmony and so forth. So it’s — look, it’s a really fun play. It’s like all James Graham plays: it’s got a serious point, but it’s also a bit of a hoot as well.

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Lucy Fisher
Sounds great. Well, that’s all we’ve got time for for this episode of the FT’s Political Fix. My thanks to Stephen Bush and George Parker. If you like the podcast, please do subscribe. You can find us through all the usual channels to receive episodes as soon as they’re released. We also appreciate positive reviews and ratings. It really does help spread the word. Political Fix is presented by me, Lucy Fisher, and produced by Anna Dedhar and Audrey Tinline. Manuela Saragosa is the executive producer. Original music and sound engineering is by Breen Turner. Cheryl Brumley is the FT’s global head of audio. We’ll meet again here, same time, same place next week.

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