Anybody seeking an explanation for the bloody nose received by the government in last week’s election should start with wages, prices and living standards.
Sure, the Conservatives fought a terrible campaign. True, Theresa May’s shortcomings were exposed. No question, the mobilisation of young voters by Labour played a big part in the result.
But the bedrock of any successful election campaign is the state of the economy and, in particular, whether people are getting better off or not. In May 2015, when David Cameron won, real incomes were rising. Currently, as the latest inflation figures show, voters are getting poorer.
Cameron could hardly have chosen a better moment to go to the country. In the spring of 2015, the collapse in the oil price meant that the annual inflation rate was hovering around zero. Average earnings were rising by almost 3% a year, which meant that living standards were rising by a similar amount.
According to the Office for National Statistics, the annual inflation rate as measured by the consumer prices index stood at 2.9% in May, while earnings in the three months to April were 2.1% up on the same period a year earlier. The figures for May will be released on Wednesday but are unlikely to show much change in the recent a squeeze on living standards.
The upward pressure on prices initially came from a recovery in oil prices but has subsequently been the result of the fall in the value of the pound, which has made imports dearer. For a time, UK consumers were protected from the impact of the weakness of sterling because importers were hedged against currency movements. But those hedges have now expired, leaving retailers with little choice but to raise prices.
Had May won the landslide she was clearly expecting, the government would have been able to ride out this difficult period. Inflation is likely to rise a bit further but the ONS’s separate figures for producer output prices – which measure the cost of goods leaving factory gates and provide a guide to inflationary pressure early in the pipeline – appear to have peaked. Moreover, weaker consumer spending will result in lower growth and this will eventually feed through into a fall in inflation.
But May is a weakened prime minister heading a minority administration and she doesn’t have time on her side. The government has recognised that voters are unhappy about falling living standards and have had enough of cuts. Deficit reduction will now play second fiddle to the need to raise real incomes, so expect a generous uplift in the minimum wage and an easing of the curbs on public sector pay as signs that the age of austerity is over.