Will halving inflation mean a ‘5p boost’ to incomes?

“If we want to put money into the pockets of families who are really struggling at the moment, if we deliver the Prime Minister's pledge to halve inflation—that's not a 1p tax cut, that's a 5p boost in their real disposable incomes.”

“The best tax cut that I can deliver for the British people right now is to halve inflation… Inflation is a tax, it is a tax that impacts the poorest people the most.”

In interviews at the Conservative party conference both the Prime Minister Rishi Sunak and chancellor Jeremy Hunt have made claims about the impact of the government’s pledge to halve inflation.

On Sunday with Laura Kuenssberg on 1 October, Mr Sunak said that halving inflation was “the best tax cut that I can deliver for the British people right now”. When challenged by Ms Kuenssberg on whether it was accurate to describe inflation as a tax, he insisted it was, saying: “Inflation is a tax, it is a tax that impacts the poorest people the most.”

He added: “Economically, the impact that it has on people is to eat into their pockets, it eats into their wallets—it puts up the prices of things, it effectively acts as a tax. And that is why we must bring it down.”

A day later, on Radio 4’s Today programme Mr Hunt said that meeting the pledge to halve inflation was “not a 1p tax cut, [but] a 5p boost in their real disposable incomes.” He also repeated this claim about a “5p boost” in his conference speech.

The impact of falling inflation is often misunderstood, and these claims could cause confusion—we’ve received a number of questions from readers about these claims.

Inflation is not a form of taxation

Despite Mr Sunak arguing to the contrary, it is clearly not technically true that “inflation is a tax”, as he said. 

Taxes are money paid to the state to fund public services, whereas inflation is an increase in the price of goods and services.

However it is true that both taxes and inflation can affect people’s disposable income, and it seems Mr Sunak was arguing that in that respect a reduction in tax and a reduction in inflation will have a similar impact on people’s personal finances.

Reducing inflation doesn’t necessarily mean things get cheaper

The chancellor’s comments meanwhile centred on the government’s target of halving inflation from around 10% to around 5% by the end of 2023. We wrote in more detail about the government’s inflation target earlier this year.

The “5p boost” mentioned by the chancellor seems to refer to the fact that prices wouldn’t rise by as much with inflation at 5% as they would have were inflation to have remained at 10%.

But, crucially, if inflation is at 5% then prices will still be rising—people will have to pay 5p more for an item that cost £1 last year, not 5p less.

It’s important to be clear about this, as it’s a common misconception that falling inflation leads to falling prices. This would only be the case with negative inflation, something last  seen in the UK in 2015.

Ultimately, then, Mr Hunt’s claim that halving inflation would mean a “5p boost” in people’s income is only correct if comparing people’s disposable income to what they would have had had the rate of inflation remained the same.

We’ve asked the Treasury about Mr Hunt’s comments. When this comparison was made by the chancellor last month a spokesperson told Full Fact that the statement was not misleading and that “prolonged high inflation means shop prices rising faster, so halving inflation is the best way to make household incomes go further”.

Overall inflation has fallen over the year so far, but it’s also worth noting that the price of some things, perhaps most notably food, continues to rise at a considerably faster rate than the headline rate of inflation.

Image courtesy of Richard Townshend