This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.

This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.

The economic clouds have darkened further for two reasons. One, which affects just about the whole world, is the deteriorating outlook for inflation as a consequence of hostilities in the Middle East continuing through into the summer. The other is domestic, for the inevitable uncertainties over the UK’s financial management have pushed up the cost of borrowing not only for the government, but for anyone seeking to get long-term finance.

As far as inflation is concerned, one signal of alarm came from the US, where the annual inflation rate jumped in April to 3.8 per cent, the highest since May 2023, as a result of higher energy prices. We will not get UK April numbers until next week, but looking further forward, the most optimistic forecast of the Bank of England suggests inflation will peak at around 3.6 per cent by the end of this year, while its most pessimistic figure is 6.2 per cent early in 2027.

The effect of all this is that the chances of any interest rate cuts this year from the Bank of England are vanishingly small. Indeed the markets are predicting that the next movement will be up, not down. In addition, it is hard to see any significant decline in longer-term rates until our current political situation clarifies. The yield on 10-year government bonds, gilts, remains over 5 per cent – the highest since 2007 – while the yield on 30-year gilts at around 5.75 per cent is the highest since 1998.

The danger is that........

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