Economy Update — House of Commons, 2022-05-26
Topic: Macroeconomics
Rishi Sunak (Conservative, Centre-right): The high inflation that we are experiencing now is causing acute distress to the people of this country. I know that they are worried. I know that people are struggling. I want to explain what is happening, why it is happening, and what we propose to do about it I trust the British people, and I know they understand that no Government can solve every problem, particularly the complex and global challenge of inflation, but this Government will never stop trying to help people, to fix problems where we can and to do what is right, as we did throughout the pandemic. We need to make sure that those for whom the struggle is too hard, and for whom the risks are too great, are supported. This Government will not sit idly by while there is a risk that some in our country might be set so far back that they might never recover. That is simply unacceptable, and we will never allow it to happen I want to reassure everybody that we will get through this. We have the tools and the determination we need to combat and reduce inflation. We will make sure that the most vulnerable and least well off get the support they need at this time of difficulty, and we will also turn this moment of difficulty into a springboard for economic renewal and growth, with more jobs, higher skills and greater investment: our plan for a stronger economy Before I turn to the details of our plan, let me put into context for the House the challenge we face. This country is now experiencing the highest rate of inflation we have seen for 40 years. The Bank of England expects inflation to average around 9% this year. Our exposure to global shocks continues to explain most of the inflation above the 2% target. Supply chain disruption as the world reopened from covid, combined with Russia’s invasion of Ukraine and potentially exacerbated by recent lockdowns in China, are all contributing to significant price increases for goods and energy However, over the course of the year, the situation has evolved and become more serious. There are areas of particular concern. Even excluding energy and food, core inflation has become broader-based and elevated. Of the basket of goods and services we use to measure inflation, a record proportion is seeing above-average price increases. Also, we are acutely exposed to the European energy price shock and, like the US, we have a tight labour market. Make no mistake, the lowest unemployment in almost 50 years, just months after averting a jobs crisis during the pandemic, is good news, but combined with the shock to European energy prices, it does contribute to the UK’s relatively high rate of inflation Lastly, as the Bank has noted, longer-term inflation expectations have risen above their historical averages by more than they are doing in the US and Europe. We cannot and must not allow short-term inflationary pressures to lead people to expect that high inflation will continue over the long term. We can get inflation under control. It is not some abstract force outside our grasp. It may take time, but we have the tools we need and the resolve it will take to reduce inflation. We have three specific tools available to combat and reduce inflation, and we are using them all: independent monetary policy, fiscal responsibility and supply-side activism. First, our primary tool is a strong independent monetary policy. Since control of monetary policy was taken out of the hands of politicians 25 years ago, inflation has averaged precisely 2%. It is right that the Bank of England is independent, and I know that the Governor and his team will take decisive action to get inflation back on target and ensure that inflation expectations remain firmly anchored Secondly, we need responsible fiscal policy. That means providing fiscal support where required but not making the situation unnecessarily worse, causing inflation, interest and mortgage rates to go up further than they otherwise would. Excessively adding fiscal stimulus into a supply-constrained economy, especially one in which households and businesses have built up over £300 billion of excess savings, risks being counterproductive and increasing inflationary pressures. In other words, fiscal support should be timely, temporary and targeted. Timely because we need to help people when the shock is at its worst, targeted because unconstrained stimulus will make the problem worse, and temporary because if we do not meet our fiscal rules and ensure the public finances are resilient in the longer run, we create even greater risks on inflation, interest rates and the trend rate of economic growth Thirdly, we are taking an activist approach to supply-side reforms. This will increase our productive capacity, ease inflationary pressures and raise our long-term growth potential. The Prime Minister’s energy security strategy will reduce bills over time by increasing energy supply and improving energy efficiency. The Work and Pensions Secretary is moving half a million jobseekers off welfare and into work and doing more to support older people back into the jobs market. The Home Secretary is making our visa regime for high-skilled migrants one of the most competitive in the world, and in the autumn we will bring forward tax cuts and reforms to encourage businesses to invest more, train more and innovate more—the path to higher growth. Independent monetary policy, fiscal response ability and supply-side reform—the country should have confidence that using these three tools, we will combat inflation and reduce it over time But of course, we know that households are being hit hard right now, so today we will provide significant support to the British people. As I have said, a critical part of how we are dealing with inflation is responsible fiscal policy. What this means in practical terms is that as we support people more, we need to think about the fairest way to fund as much of that cost as possible. The oil and gas sector is making extraordinary profits, not as the result of recent changes to risk taking or innovation or efficiency, but as the result of surging global commodity prices, driven in part by Russia’s war. For that reason, I am sympathetic to the argument to tax those profits fairly, but—[Interruption.]