“Inflation is falling faster and further than we, or anyone else, expected,” says Sanjay Raja, a senior economist at the bank.
Slowing inflation and steady unemployment is just one of the economic fair winds at Sunak’s back.
Real wages are rising. Markets have brought forward expectations for rate cuts, easing mortgage pain. The housing market is expected to recover.
Falling inflation will increase people’s spending power just as the Chancellor’s increase in the National Living Wage kicks in in April. By May of this year, Deutsche Bank expects real wages will be rising by 2.7pc. Excluding the pandemic years, this will be the fastest pace of growth since 2015.
On top of this, households are in line to save between £10bn and £15bn this year compared to last as a result of falling energy prices, Raja says. Jeremy Hunt’s National Insurance cut, which kicked in on Saturday, will add another £10bn to take home pay.
Sunak and Hunt have been trailing further tax cuts at the Spring Budget, which will take place on March 6. Falling inflation means it is feasible that the Chancellor could have more fiscal headroom. Income tax cuts and a drop in inheritance tax rates are both on the cards.
However, holding out until autumn for an election comes with its own risks.
First, the longer Sunak waits, the more homeowners there will be who have rolled off cheap fixed deals and onto higher rates. 1.5m homeowners have fixed rate mortgages that expire this year.
“Even if interest rates are starting to come down, they will still be higher for those people who are remortgaging,” says Owen at the Institute for Government. “Every month that goes by, more households will see their payments go up.”
Second, Sunak will be taking a gamble on the local and mayoral elections in May.
Owen says: “If those don’t go well, it could remove any momentum that they might have built up after the Budget.”
There are also wider geopolitical risks that are far beyond Sunak’s control. The disruptions to trade through the Red Sea following Israel’s war with Hamas, for example, could bring new inflationary pressures.
Then, there is a question mark over how much Hunt will actually be able to deliver in the Spring Budget. The National Insurance cut was based on “implausibly tight” spending plans, says Owen, and further giveaways could stretch public finances beyond breaking point. If the Budget disappoints, disillusionment may set in.
