The prime minister played down concerns about price rises and the cost of living in a range of TV interviews on Tuesday, the day before univeral credit – a major pillar of the social benefits system – is due to be cut by £20 per week.
His remarks came as gas prices breached £3 per therm in the UK for the first time, while also climbing across Europe. Tuesday’s rise now means prices have tripled in the last two months and broader measures of the cost of living are also rising sharply.
Consumer prices rose 3 per cent in the 12 months to August, while the Bank of England expects inflation to reach 4 per cent by the end of the year, potentially outstripping what experts at the Office for National Statistics (ONS) believe is the best guess at true pay growth of between 3.2-4.4 per cent.
The prime minister told Sky News that supply pressures and rising costs were symptomatic of the global economy “coming back to life very rapidly” after the Covid-19 pandemic.
“People have been worrying about inflation for a very long time, I am looking at robust economic growth, and by the way, those fears have been unfounded,” he said, adding: “Supply will meet demand.”
However, his remarks flew in the face of analysis from economists across the political spectrum, and the head of the UK’s energy regulator, Ofgem.
Chief among concerns shared by economists and interest rate setter the Bank of England is that prices are rising while economic growth shows some signs of stalling.
Measures of wage growth which appear to show an uptick in pay, and which the prime minister has repeatedly used to justify a hard line of immigration post-Brexit, have been distorted by the pandemic, according to independent experts at the ONS.
They argue that they do not show wage growth which is as robust as the prime minister’s choice use of some figures suggests. This paints a falsely positive picture due to the slump in pay earlier in the pandemic and limits on how to measure pay rolls amid furlough and sudden lockdowns.
“The public policy discussion this week has lost all touch with reality,” tweeted Torsten Bell, head of think tank the Resolution Foundation. This was because while wages in a few sectors had risen, price rises were taking hold across the economic spectrum, creating a cost-of-living squeeze, he added.
Meanwhile Ofgem’s chief executive told the Scottish parliament that soaring natural gas prices will be “pretty difficult” for customers to contend with. The effect would last through this winter and beyond, he told MSPs.
Energy bills for 15 million households were set to increase by at least £139 under the price cap introduced at the start of October, as suppliers grapple with soaring wholesale prices following the collapse of many smaller firms. For those consumers on prepayment meters, average prices will rise by £153.
Natural gas prices have climbed sharply this year, adding to pressure on energy suppliers who may not have hedged their entire portfolio of customers, by locking in fuel prices ahead of time and forcing some out of business.
Ofgem’s CEO, Jonathan Brearley, told Holyrood’s energy committee that “unprecedented changes” in the gas prices “were putting strain on the wholesale market”, but he argued that the price cap was still offering customers good value for money.
Mr Brearley added that “a series of factors internationally” were “constraining supply”.
He said: “It looks like there is little over and above long-term contracts coming from Russia and equally there are some issues with some of the liquefied natural gas (LNG) terminals – all of which means supply is constrained and demand is higher than you’d expect.
“In terms of duration, it is very, very hard to tell and our view is we need to be open-minded about how long it might last, and for a range of scenarios.”
Meanwhile hopes among some analysts that Russia might increase its gas supply to Europe in order to ease the pressures on supply going into winter, at a time of depleted reserves in the UK and continental Europe, appeared misplaced.
Russian leader Vladimir Putin said that the supply crunch in Europe and beyond was the result of “unbalanced decisions” and “drastic steps” in order to reduce carbon dioxide emissions, according to a report by the Reuters news agency.
“You see what is happening in Europe. There is hysteria and some confusion in the markets. Why? Because no one is taking it seriously,” he said.
“Some people are speculating on climate change issues, some people are underestimating some things, some are starting to cut back on investments in the extractive industries. There needs to be a smooth transition.”