Inflation threatens Tories election chances

It is probable that the next election will take place in May 2015. The ‘Fixed Term Parliaments Act 2011’ makes that much more likely. The restive Conservative back benchers may decide to challenge David Cameron before then but they lack a flag bearer and occasional outbursts from Liam Fox or David Davis will achieve little.

It is in the Tories best interests to run for the full five years. They can ditch the Liberal Democrats after four and then expect the economic cycle to move in their favour. The good years lasted from (say) 2001 to the collapse of Lehman Bros in 2008 and so the period of austerity (when money regains its true value) should ease around 2013/14. Voters will forgive everything if real wages start to rise and they can pay their mortgage and credit card bills.

The strength of the pound suggests that George Osborne has got it right. Two or three periods of improved growth, a new Governor of the Bank of England and a settled Europe will pave the way for an election victory.

Suddenly two real threats to this scenario have appeared. The first is a desertion by a number of Conservative donors. According to information released by the Electoral Commission Lord Ashcroft, Michael Spencer and Lord Harris of Peckham are giving a fraction of their previous largess. Party membership is in decline and revenues, which are difficult at the best of times, are collapsing. The City is struggling with the decline of financial markets and their support is withering. It is said that donor pressure caused the demise of Iain Duncan Smith as Party leader. The Prime Minister has shown little regard for his constituency members (the resignation of chick-lit Louise Mensch in Corby, news buried during the Olympic Games, may come back to haunt him) but there is a greater threat ahead.

There are increasing pressures on the rate of inflation. If the Governor of the Bank of England does not get the Consumer Price Index (“CPI”) down to below 3% (1% above the target of 2%) by January 2013 he will be forced to write to the Chancellor, something he is quite used to doing. The forecasts are now under pressure from rising food and energy prices and transport costs are rising.

The big threat however remains oil prices. Brent crude has been going up steadily to around $116.00. Diesel is now around 141p. The real issue remains whether Israel invades Iran before the Presidential election in November. Iran’s oil production is already down 25% to 3m barrels a day as buyers find alternative sources.

OPEC however accounts for 27% of world supplies and a Middle East conflagration could see oil prices soar. That could result in inflation soaring, mortgages go through the roof and the green shoots of recovery wither on the vine. The Conservatives could be wiped out by this scenario.

Ed Balls as Chancellor? My offspring has announced that he’s emigrating to Australia. Shrewd move Son.

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