Liz Truss doesn’t necessarily need monetary policy to take control of inflation

The selection of the UK’s new PM today was largely priced into the market so little changed in gilts or sterling. As a promise to her voters, in the first week of office, she would do something to address the cost of living crisis. Last week the Office of National Statistics (ONS) reported that UK energy bill discounts would not lower inflation as they are not part of the inflation calculation. If incoming PM Liz Truss were to freeze the current cap on energy prices and thus give an overall reduction in the price of energy over time (vs giving a discount through the energy bill support scheme -EBSS), this could be treated very differently by the ONS. The former counting toward the inflation basket and thus lowering overall CPI, whist the EBSS discount is not in the calculation (so will not affect CPI). Hotly debated over the last 5 days, it’s for the ONS to decide whether to calculate as income or expenditure and this could have a big impact on the value of inflation linked securities. From a governmental perspective lowering inflation using fiscal tools might end up paying for itself as the governments’ own inflation linked liabilities would also be lower in the future. Monetary policy works, but fiscal policy could work faster.

The value of investments will fluctuate, which will cause prices to fall as well as rise and you may not get back the original amount you invested. Past performance is not a guide to future performance.

Bond Vigilantes

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