Sunak Aims to Inflate the Tories’ Election Chances

Editors’ Note: MarketMinder Europe prefers no political party nor any candidate. We assess developments for their economic and market impact only.

UK inflation slowed markedly in April, and naturally, the immediate outcome was … a general election.^[i] Yes, Prime Minister Rishi Sunak reacted to the latest economic news by alerting King Charles that he is dissolving Parliament ahead of a 4 July vote.^[ii] In the near term, we suspect this move likely increases uncertainty, which might bring some headwinds or wiggles to UK stocks. But as it eases, we think the UK will likely keep participating in the global bull market.^[iii]

In our experience, inflation reports typically drive interest rate chatter amongst commentators we follow, with plenty of speculation about what it means for monetary policy. Britain had a healthy dose of that, too, with headlines we follow debating whether the consumer price index (CPI, a government-produced index tracking prices of commonly consumed goods and services) slowed enough to keep rate cut hopes alive. The headline CPI eased from 3.2% y/y in March to 2.3%—a big drop, as the lower energy price cap took effect.^[iv] This is tantalisingly close to the Bank of England’s (BoE's) target, 2.0% y/y. But it is also faster than the 2.1% consensus estimate, extending talk in publications we follow of stubborn inflation delaying cuts.

Adding to scepticism in coverage we read, core inflation (which excludes food, energy, alcohol and tobacco) remained elevated, slowing from 4.2% y/y in March to 3.9%.^[v] And the Office for National Statistics’ (ONS) preferred inflation measure, which includes owner-occupiers’ housing costs (CPIH), was also higher at 3.0% y/y (down from 2.8% in March).^[vi] CPIH’s services component remained stuck at 6.0% y/y.^[vii]

As in the US, commentators we follow write of high hopes for a BoE rate cut—and spend many paragraphs exploring what BoE policymakers say on the matter. Governor Andrew Bailey said this week the next move will likely be a cut but, of course, wouldn’t pin down timing.^[viii] Neither would outgoing Deputy Governor Ben Broadbent, who said on Monday a cut might arrive this summer.^[ix] But Monetary Policy Committee (MPC) member Megan Greene isn’t convinced, calling wage pressures too high last week.^[x]

We suggest tuning it all out. Like its peers, the BoE claims to be data-dependent and votes by committee.^[xi] What any single member says this month might not apply by 20 June, the next meeting. The data could change. Their interpretations could change.

All of these comments, too, came before the April inflation report. How many committee members will share headlines’ disappointment that headline CPI was slightly higher than expected? How many buy the—fallacious, in our view—idea the BoE can fine tune inflation down perfectly to 2.0% y/y? We see no way to know. But given the UK economy resumed growing with higher interest and inflation rates whilst its stock market is clocking new highs, we doubt it matters.^[xii] Markets seemingly moved on.

In our view, UK inflation is mostly a political issue now. Not just because April’s report—in conjunction with fast Q1 GDP growth—seemed to be Sunak’s impetus for calling an election.^[xiii] But also because Sunak, Labour Party leader Keir Starmer and all their lieutenants have been jabbering about the cost of living for what seems like ages. Sunak staked his reputation on getting inflation down to 2.0% this year and more or less declared mission accomplished! on Twitter X Wednesday morning.^[xiv] Given the Conservatives are polling on 23% to Labour’s 44%, perhaps he thinks some economic cheer will be enough to minimise seat losses if he strikes whilst the data are good.^[xv]

That is one opinion we saw when touring political commentary this week. The other theorised that with so many spending commitments in the books and deficits coming in higher than expected, Chancellor of the Exchequer Jeremy Hunt sees no chance of including tax cuts in the Autumn Statement budget package.^[xvi] Absent a pre-election giveaway to entice voters, there was perhaps little logic in waiting for a yearend vote in hopes of improving poll numbers.

Not that a Labour landslide is a foregone conclusion. A mighty polling lead is a considerable advantage, in our view. But early poll numbers aren’t all-telling. Starmer is untested on the campaign trail, where simply opposing government policy likely won’t win the day, in our view.

Therefore, all possibilities would seem to be on the table. Either party could win a majority if they campaign well. A hung Parliament is possible if Reform UK and the Liberal Democrats focus on a handful of potentially gettable seats and the Scottish National Party recovers from its internal issues and runs the table up north.

In our view, this means uncertainty lingers. But we think it should fade quickly, and not only because the election is just six weeks away. Rather, we don’t see much daylight between the two major parties’ policies. Both parties talk of the need to trim the deficit and cut taxes. Both want to increase investment and stop London from losing stock listings to New York and the EU. Both talk of building housing and increasing home ownership.

Therefore, regardless of which party wins, we find it hard to envisage economic policy veering much from the status quo—the government will likely face gridlock akin to what the Tories have faced since 2019.^[xvii]

In our view, that could easily happen to a Labour government. Plus, for all the talk we have seen of cutting taxes, prior governments legally wedded economic policy to Office for Budget Responsibility (OBR) scoring and deficit forecasts, giving the civil service and economic groupthink de facto veto power over big changes.^[xviii] We suspect this is a big reason why Hunt and his predecessors only ever tweaked economic policy at the margins. In all likelihood, should Labour win and Rachel Reeves become Chancellor, she would probably end up in a similar predicament.

For voters, relative policy stasis might be frustrating. For stocks, we think it is probably just fine. Our research shows big policy changes, however well-intended, and whatever their forecasted long-term effects, create winners and losers. That creates risk aversion, incentivising businesses to wait and see how things change before committing long-term investment. Gridlock lowers legislative risk, giving businesses more confidence to plan and invest. Enabling risk taking adds tailwinds for stocks, in our view.

So as the dust settles and stocks get clarity on who will be in charge, we think they will also get clarity on how much gridlock there is. Few seem to expect gridlock now, in our view, likely making its extension—should that happen—quietly bullish.