Sunak Aims to Inflate the Tories’ Election Chances

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UK inflation slowed bigtime in April, and naturally, the immediate outcome was … a general election. Yes, Prime Minister Rishi Sunak reacted to the latest good economic news by alerting King Charles that he is dissolving Parliament ahead of a July 4 vote. Will Brits declare their independence from Sunak and his Conservative Party? Or will a close vote bring fireworks? Puns aside, we reckon UK stocks face near-term uncertainty, which might bring some wiggles. But as it eases, the UK should keep participating in the global bull market.

Typically, inflation reports drive interest rate chatter, with gobs of speculation about what it means for central bank policy. Britain had a healthy dose of that, too, with headlines wondering whether CPI slowed enough to keep rate cut hopes alive. The headline Consumer Price Index (CPI) eased from 3.2% y/y in March to 2.3%—a big drop, as the lower energy price cap took effect.^[i] This is tantalizingly close to the BoE’s target, 2.0% y/y. But it is also faster than the 2.1% consensus estimate, extending talk of stubborn inflation delaying cuts.

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

As in the US, many have high hopes for a BoE rate cut. And spend a lot of time reading into 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. Neither would outgoing Deputy Governor Ben Broadbent, who said on Monday a cut might arrive this summer. But Monetary Policy Committee member Megan Greene isn’t convinced, calling wage pressures too high last week.

We suggest tuning it all out. Like its peers, the BoE is data-dependent and votes by committee. What any single member says this month might not apply by June 20, 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 idea the BoE can fine tune inflation down perfectly to 2.0% y/y? There is no way to know. But given the UK economy resumed growing at higher rates and its stock market is clocking new highs, we doubt it matters. Markets 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. But also because Sunak, Labour Party leader Keir Starmer and all their lieutenants have been jabbering about the cost of living for 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.^[v] Given the Conservatives are polling at 23% to Labour’s 44%, perhaps he thinks some economic cheer will be enough to minimize seat losses if he strikes while the data are good.^[vi]

That is one take we saw when touring political commentary this morning. The other theorized 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. 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.

Waiting also may have opened a wider door for Brexit champion Nigel Farage to return as head of Reform UK, an upstart party courting alienated Conservative voters. In our view, this—not economic data—is the real wildcard. Reform is polling at 12%.^[vii] Most of that comes from traditionally conservative voters who express frustration that the Tories abandoned their 2019 electoral platform. Reform has little to no chance of gaining any clout in Parliament, but a strong showing raises the likelihood of a Tory wipeout. An earlier contest might cut this risk, as it affords less time for the upstarts to organize a campaign. 

Not that a Labour landslide is a foregone conclusion. A mighty polling lead is a considerable advantage. But early poll numbers aren’t all-telling. Starmer is untested on the campaign trail. It is easy to get support when hitting zingers against a beleaguered prime minister in Parliament. It is harder out on the stump, when it is time to push your own agenda.

Adding complications, some of Starmer’s top team have faced scandals in recent weeks. There are also divisions within the party over sociological issues. The party isn’t in quite as much disarray as the Conservatives, but this isn’t Tony Blair’s New Labour juggernaut of 1997.

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 smaller parties focus on a handful of gettable seats and the Scottish National Party recovers from its internal issues and runs the table up north.

Which means uncertainty lingers. But it should fade quickly, and not only because the election is just six weeks away. Rather, there isn’t much daylight between the two major parties’ policies. Starmer has focused on restoring Labour’s economic and business credibility after Jeremy Corbyn’s tarnished leadership. He has sought business support and seems to have tailored economic policy accordingly. 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, it is hard to envision economic policy veering much from the status quo. The Tories won a 2019 landslide but hardly passed much as intraparty divisions created stealthy gridlock.

That could easily happen to a Labour government. Plus, for all the talk of cutting taxes, prior governments legally wedded economic policy to Office for Budget Responsibility scoring and deficit forecasts, giving the civil service and economic groupthink de facto veto power over big changes. This is why Hunt and his predecessors only ever tweaked economic policy at the margins. In all likelihood, should Labour win, probable Chancellor Rachel Reeves will end up in a similar predicament.

For voters, relative policy stasis might be frustrating. For stocks, it is probably just fine. Big policy changes, however well-intended, and whatever their forecasted long-term effects, create winners and losers. That creates risk aversion, incentivizing 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.

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