My four-point plan to get the tiger of inflation back in its cage

At last, a chink of light: inflation took a fairly hard fall in the year to October, easing from 3.8 per cent to 3.6 per cent.

This was in line with the City’s and, more importantly, the Bank of England’s forecasts. However, don’t underestimate the importance of the first fall in seven months. It is a real sign that the Bank’s central case, which holds that inflation should start to fall towards its 2 per cent target after an autumn peak, holds water.

It also provides a timely boost for Britain’s beleaguered chancellor, Rachel Reeves, ahead of what still promises to be a deeply unpleasant Budget, by reducing her borrowing costs and offering her some much-needed breathing room. Not enough to ease the coming pain by much. But at this point, most people are probably of the view that we’ll take what we can get.

But is the inflationary tiger now back in its cage, with its claws clipped? That remains an open question.

That consumer prices index, the basket of everyday goods (also known as the CPI) used to measure price changes, might have fallen, but it is still running too hot, greatly exceeding that two per cent target. The economy remains on the sick list, so the Bank will likely cut rates again at the December meeting of the Monetary Policy Committee (MPC). It nearly did last time. The vote to hold at 4 per cent was on a knife-edge at 5-4.

But there is still work to be done, and the Reeves budget could complicate the task.

Firstly, to keep inflation in its box, she should start by ensuring that fiscal (taxation) policy is pulling in the same direction as the Bank’s monetary (interest rate) policy. One of the worst mistakes Reeves has made was her decision to tax jobs, and especially lower-paying jobs, by hiking employer national insurance contributions (NICs) and reducing the level at which they kick in. Employers naturally responded by cutting jobs and, where this was impossible, by hiking prices.

Will that happen again? The hokey cokey we’ve seen with respect to tax-raising proposals this time around – all those briefings and counter-briefings – makes the coming event unusually hard to predict.

It goes without saying that raising taxes will further hurt a sluggish economy and make voters cross. But Reeves absolutely has to consider the inflationary impact of her decisions, as well as the political one. She must prioritise revenue-raising measures that keep the tiger quiet. Such a move would be to her and her party’s long-term benefit. That would be my first suggestion.

Secondly, get a grip on energy policy. One pre-budget report that has caught my eye is the suggestion that she might actually cut VAT on energy bills, currently 5 per cent. That would be an excellent move, not least because it would help to ease the horrible “heat or eat” dilemma that too many families face at this time of year (food price inflation was a notable blackspot in the latest figures, jumping to 4.9 per cent)

Moreover, it was the spike in energy prices that revived inflation as a force to be reckoned with and a knotty problem to be solved. The energy price spike got underway before the outbreak of war in Ukraine, but the latter turbo-charged the process. It forced the Truss government to subsidise bills at enormous cost to the exchequer.

Don’t let us kid ourselves. A repeat is perfectly possible. The long-term solution is, obviously, to reduce our dependence on imported hydrocarbons and thus wholesale energy prices. We need more renewables, and perhaps more nuclear. The latter makes me uncomfortable, but if the end result is domestically produced energy and more stable prices, so be it. The VAT cut would at least offer some immediate relief. Fixing energy long-term is solution number two.

My third suggestion would be to reduce trade barriers. One of the chief arguments against Brexit was that it would lead to higher food prices. Case proved. It’s finally dawned on Labour that an increasing number of people recognise that it was a thoroughly bad idea. Time to work harder at damage limitation. Just because it’s difficult doesn’t mean it isn’t worth doing.

Finally (for now), the impact of regulation needs to be considered. Ministers from both the previous and the current administration have banged on about their desire to cut red tape and foster growth by doing so. And it’s so much hot air.

An example: in 2021, the previous government introduced regulations covering the placement in retail stores of “certain foods and drinks that are high in fat, salt or sugar (HFSS) or less healthy”. The result was that it forced supermarkets to rearrange their entire brick-and-mortar estates, at considerable cost.

I get it. Obesity is a big and very expensive problem. But this sort of nannying, however well-intentioned, is also pricey. The affected businesses had no choice but to pass on the costs, stoking, you’ve guessed it, inflation again.

Getting a grip on red tape would help to keep it at bay. Is all this asking too much? I don’t think so. None of this is rocket science. It just takes politicians capable of using their grey matter. Yes, I know. I know...