PM Sunak calls General Election on same day UK inflation drops to 2.3%

Prime Minister Rishi Sunak has called a General Election on Thursday 4 July, despite the Conservative Party remaining far behind Labour in the polls.

Earlier today, UK inflation fell to its lowest in three years, at 2.3 percent. This is nearing the Bank of England target of 2 percent, but inflation remains higher than expected.

Experts in economics and politics across City react.

There may be less student voters in July for the "Conservative Party of chaos", says Dr Lise Butler

Dr Lise Butler, Senior Lecturer in Modern History at City, University of London said:

Sunak’s decision to call this election now is clearly motivated by recent lower inflation numbers. There are concerns that a July election could produce a lower turnout, due to school holidays, but I think this is unfounded.

Historically, there hasn’t been a clear correlation between voter turnout and the timing of elections - voter turnout declined sharply in the 1990s, and has recovered somewhat since, a trend which is independent of the specific timing of elections.

However, a July date may mean lower turnout amongst students, as they are often registered to vote in the city in which they study rather than their home community, which may be slightly beneficial to the Conservative Party due to its unpopularity with younger voters.

The timing of this election may play into a favourable narrative for Labour. The last general election to be held in July was on July 5th, 1945, when Labour won a huge majority of 393 seats.

All signs suggest that Labour is likely to win another considerable mandate almost 79 years to the day of one of its most historic victories.

The days to come will be very busy – a big question will be which MP’s will be standing down. 65 Tory MP’s have already declared their intention to stand down or not contest their seat in the next election.

Starmer’s address following Sunak’s announcement was consistent with the Labour Party’s recent messaging, presenting Labour as the party of responsible government and change, and the Conservative Party as the Party of chaos.

Over the weeks to come Starmer will be under significant pressure to be more concrete about what Labour’s programme for change will look like.

One thing that was interesting about Sunak’s address was that he specifically portrayed Starmer as untrustworthy, a charge frequently levelled at the Labour leader from within the Labour Party over for reneging on the more progressive promises of his leadership campaign.

I think that this signals that this may be a major theme in the Tory campaign to come. I also expect the Conservatives (and especially those on the right of the party) to ramp up culture war attacks, but its less clear whether these will stick enough to move poll numbers.

Short-term fluctuations in inflation are affected by all sorts of outside factors, not related to government or central bank policy and long-term trends.

Generally, as the impact of outside pressure has eased – such as energy prices – the expectation was that inflation would drop more quickly than it has.

Most of the focus is now on the Bank of England, and in particular on its choice of overnight interest rates. Since the great financial crisis, it has also played a substantial role through quantitative easing in determining long-term interest rates as well.

Less mentioned is the role of fiscal policy. The UK has run substantial deficits these last few years and it is expected to be 3.1% of GDP this fiscal year, significantly more than the growth rate. Absent the expectation of future surpluses, that puts pressure on prices.

Paradoxically, the expectation that the Labour party will in all likelihood win the upcoming elections and rely heavily on debt to finance their spending plans actually contributes to higher inflation now.

Inflation dropped to 2.3 per cent thanks to the high interest rate policy which has now become somewhat of a norm in most of the developed part of the world.

The new figures are still somewhat higher than the market expectations of 2.1 per cent, implying that the inflation seems in fact more persistent than many expected.

Service inflation is a better proxy for domestic price pressures and it also stayed high at around 5.9 per cent, which is 0.4 per cent higher than market expectations.

These negative surprises in markets have clearly made it less likely for the Bank of England to start cutting rates any time soon, which could help the current government by improving economic prospects in the short-term prior to the upcoming elections.

Of course, inflation being so close to the target for the first time since mid-2021 will be celebrated by the government as a positive selling point; but the burden that British citizens and businesses carry due to high interest rates does not seem to be disappearing any time soon.