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Sunak says extra cost-of-living help risks stoking UK inflation

Bloomberg

Chancellor of the Exchequer Rishi Sunak said that extra government spending to help ease Britain’s cost-of-living crisis risks further stoking inflation, as he warned of tough months ahead for the UK economy.
“We need to be careful,” Sunak said at the annual dinner of the Confederation of British Industry, speaking to hundreds of executives. “At a time of severe supply restrictions, an unconstrained fiscal stimulus does risk making the problem worse.”
Sunak and UK Prime Minister Boris Johnson are facing growing pressure to announce new policies to ease a squeeze on living standards, with inflation running at its highest rate in 40 years. Sunak said he stands ready to act as the situation evolves, but didn’t detail any new measures.
More government intervention would increase prices, embed high inflation expectations and create a “vicious cycle” of higher interest rates and mortgage costs for the homeowners, Sunak said.
“Even as we protect people from the worst of the crisis, we must continue to be responsible with the public finances,”
he said.
The challenge for Johnson is convincing voters that his response is indeed the best possible, as he faces calls to introduce a windfall tax on the profits of oil and gas companies to offset a steep rise in energy bills. The Conservatives voted against the policy in Parliament, but Sunak has said he doesn’t ultimately rule it out.
Sunak and Johnson say their preference is to boost economic growth and create more high-paying jobs as the best answer to the living standards squeeze. Sunak promised to cut business taxes in his autumn budget to spur investment in the British economy.
“We need you to invest more, train more, and innovate more,” Sunak said. “We will cut your taxes to encourage you to do all those things.”
UK business investment is currently weak — 9.1% below its pre-coronavirus pandemic levels — according to latest data from the Office for National Statistics. Tony Danker, director-general of the CBI, said stimulating investment is a priority to avoid an economic slump.
Sunak’s intention to cut taxes on business investment at a future budget “should become a firm commitment now,” Danker said. “It will ensure that any firm pausing an investment now will be bold, decisive and back their original plans.”
Britain’s Chancellor also spoke supportively of the Bank of England, which has been criticised by senior Conservatives for failing to better contain inflation. The BOE’s mandate is to target inflation at 2%. It is currently at 9%.
“I know the governor and his team are completely focused on getting inflation back to target,” Sunak said, referring to BOE chief Andrew Bailey. “They are rightly independent.”

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