A sharp rise in a single economic indicator could be curtains for the chancellor

Could Wednesday’s inflation data be the end of the chancellor? If that sounds like hyperbole, let’s work it through.

We are in the midst of a very real economic crisis, and the next update of the Consumer Prices Index (CPI) will have a very real bearing on that. It could be the most consequential release since inflation peaked at a shattering 11.1 per cent in October 2022.

Chancellor Rachel Reeves’s tax, spending and especially borrowing plans are coming under increasing threat from the sharp rise in borrowing costs, caused by a severe bout of distemper on the bond markets that Britain relies on to fund its debt, and thus keep the show on the road.

Monday brought no relief on that front as yields – the interest rate – continued to edge higher as the sell-off of Britain’s bonds continued apace. The Bank of England’s former governor Mark Carney once warned that this country was overreliant on the kindness of strangers. That looks increasingly prescient. Those strangers are not being very kind.

Meanwhile, the government’s other economic woes continued to mount. A fresh pointer came courtesy of Page Group, a recruiter that operates in the white-collar sector. It warned that clients were “tightening” their hiring budgets and becoming more “risk averse” in a downbeat trading update/profit warning. That there is the canary in the jobs’ coalmine. It looks in urgent need of veterinary attention.

An interest rate cut would ease at least some of the pressure the government is currently under, reducing its borrowing costs (one would hope) and giving businesses, smaller businesses in particular, a much-needed shot in the arm. But a widely anticipated move at the end of the February meeting of the Bank’s Monetary Policy Committee (MPC) is still very much dependent on inflation behaving itself. That is something prices haven’t been doing of late.

CPI inflation shot up to 2.6 per cent in the year to November 2024, up from 2.3 per cent in the 12 months to October. That was the highest recorded rate since March. Wednesday’s update is expected to deliver a broadly similar result: no change, or perhaps a marginal increase. Investec’s chief economist Philip Shaw, for example, thinks 2.7 per cent. A modest rise like that would still theoretically give the MPC the space it needs to move rates down and have those working in No 11 Downing Street breathing an audible sigh of relief.

It should also have a calming effect on the increasingly febrile financial markets. But what if it does something unexpected? Here’s Shaw’s view: “Given the UK turmoil last week, markets will be especially sensitive to a poor inflation number. Anything very close to 3 per cent would not be taken well.”

That there is some classic British understatement. Anything close to 3 per cent could be enough to squash those rate-cut hopes and have seas of red covering dealing screens. The Treasury’s precious forecasts might well find themselves binned. Tax rises? Spending cuts? Brace yourself.

The rate-setting Monetary Policy Committee clearly showed it was worried about the health of UK plc at its last meeting, which held rates at the current 4.75 per cent, but on a split vote, in which the dissidents made their concerns about the economy very clear.

However, the MPC’s 2 per cent inflation target is king. With the exception of the redoubtable interest rate dove Swati Dhingra, there won’t be much dissent on the MPC if inflation starts heading northwards at an unexpectedly rapid rate, because the primary goal of the MPC is maintaining price stability. Helping a torpid economy or throwing a buoyancy aid to a chancellor who finds her boat uncomfortably close to the rocks on a stormy day is of secondary importance.

That’s February. The markets’ reaction would be immediate, including the one we’re all worried about: the bond market. The rise in the cost of servicing the UK’s ?2.8 trillion debt is wrecking the government’s projections having scorched the ?9bn of “headroom” the chancellor had when setting her tax and spending plans against her iron-clad (so we’ve been told) fiscal rules. As I said on Friday, her current strategy appears to be to sit on her hands and hope the markets calm down. Which they still might do, because markets are apt to overreact and typically correct after a big shift.

They won’t do that if a rise in inflation kills off hopes of a rate cut and adds to the recession fears haunting the UK economy. They won’t do that if the word “蝉迟补驳蹿濒补迟颈辞苍” – high inflation/interest rates, but little or no growth – hangs around like an uninvited guest with a severe case of halitosis.

An interesting factoid produced by broker AJ Bell concerned how the stock market has been behaving. Technology, industrials, healthcare and consumer stocks found themselves out of favour, while commodities, utilities and property were chilli-pepper hot.

These are traditionally seen as low-risk, defensive sectors, with earnings and dividends that are reliably stable even when the economy is hurtling towards a brick wall. They’re seen as good places to park your money when everything else is falling apart and risk is something best avoided where possible.

The problem for Reeves is that she can’t find a safe hidey-hole in which to bury herself while everything is falling apart. She and the government in which she serves have suddenly found themselves horribly exposed. You do not want to be in the position where a bad set of data puts your whole strategy into a spin. And that is where Labour is.

Wednesday could be the tipping point – which is why I say it could break the chancellor. Maybe not immediately, but the clock will be ticking.

Tick, tick, tick.