Good morning. Liz Truss is inflation's latest political victim, and probably not its last. |
 | | Liz Truss.Daniel Leal/Agence France-Presse — Getty Images |
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Inflation is profoundly difficult to fight. Liz Truss's political collapse is proof of that. |
Truss announced yesterday that she would resign as Britain's prime minister after just six weeks in office, making her tenure the shortest in the history of the job. "I cannot deliver the mandate on which I was elected," Truss said in brief remarks outside 10 Downing Street. |
A main factor in Truss's resignation: her tax cut plan, which sent the country's financial markets spiraling because investors feared it would drastically worsen inflation. Truss tried to abandon the plan and fired the finance minister who spearheaded it. But she could not undo the political damage that the proposal had done, and her government's problems grew from there. |
Truss's plan amounted to a fairly typical conservative economic agenda. It would have cut taxes across the board, particularly benefiting Britain's richest. She resisted calls for new revenue or spending reductions to make up for the cost of the tax cuts, but that also is not unusual for conservative economic plans. (During his first year as president, Donald Trump also enacted large tax cuts that disproportionately benefited the rich and were not fully paid for.) |
But what is typical in ordinary economic times can backfire during periods of high inflation. A strong economy can cause prices to rise quickly by driving too much demand for a limited supply of goods and services. So boosting economic growth — the goal of tax cuts — can actually worsen inflation. |
"Every country is facing the dilemma of how to blunt the impact of inflation without making inflation worse," said my colleague Patricia Cohen, a global economics correspondent in London who has written about Truss's plan. |
In today's newsletter, I want to walk through Truss's downfall and the political challenge of inflation. |
 | | Customers shopping at a market in south London.Sam Bush for The New York Times |
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This week, Britain reported its fastest pace of inflation since 1982: Prices increased by 10.1 percent in September compared with the year before. Russia's invasion of Ukraine is largely to blame, prompting rising food and energy costs across Europe. |
Though the war and its economic fallout preceded Truss's time in office, her agenda threatened to worsen inflation, Patricia explained in The Times. The tax cuts were meant to grow the economy and offer relief to Britons to help deal with rising prices. But in doing so, the cuts would lead to more demand by giving people more money to spend at a time when supplies cannot keep up. |
That increase in demand could have been offset, at least partly, if the government reduced spending or increased other taxes to make up for the cuts. When the government pares down spending, it effectively lessens demand for the goods and services that it is no longer paying for, whether it's food, military equipment or health care. Similarly, when the government raises taxes, it pulls money out of people's pockets, also reducing spending and demand. |
Truss not only ruled out spending cuts and tax increases but also proposed an unfunded energy subsidy, which would have increased government spending. |
In response to the plan, British stocks and bonds plunged, and the pound hit its lowest point against the dollar in almost four decades. After Truss said she would resign, the markets inched up yesterday, although investors' concerns over political instability prevented a full rally. |
The idea can sound counterintuitive — that government officials should work against economic growth. But fighting inflation calls for such an approach. So central banks, including Britain's, have increased interest rates: They hope to start a chain reaction of less investment to less economic growth to less demand to less inflation. |
While the method sounds painful, it can be good for economic growth in the long term. If high inflation becomes entrenched, only increasingly drastic action can bring it down. That scenario played out in the 1970s and '80s, when the U.S. Federal Reserve aggressively increased interest rates to tame rising prices, forcing a deep recession. |
For now, central banks around the world are trying to avoid such drastic measures. It's unclear whether they'll succeed, as I've written. But the longer inflation goes on unchecked, the more difficult their goal of a "soft landing" becomes to achieve. |
In that sense, Truss's plan threatened to not only worsen inflation now but also cause even more economic turmoil down the line. "It was the worst possible policy for the time," Patricia said. |
Inflation is uniquely difficult to deal with because it flips the traditional political playbook on the economy, from fueling growth to slowing it. |
Rising prices are also causing political turmoil not just in Britain but around the world: In the U.S., Republicans are focusing on high inflation as a major campaign issue in their efforts to take back control of the House and Senate in next month's elections. And in France, tens of thousands of people marched this week in protest over the rising cost of living. |
Truss's undoing, then, could be just the beginning. |
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Matthew Cullen, Natasha Frost, Lauren Hard, Lauren Jackson, Claire Moses, Ian Prasad Philbrick, Tom Wright-Piersanti and Ashley Wu contributed to The Morning. You can reach the team at themorning@nytimes.com. |
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