Prime Minister Boris Johnson appears to be reaching the end of the road as support for him to stay in the role collapses.

Previously loyal supporters like Transport Secretary Grant Shapps and Home Secretary Priti Patel joined many of their colleagues in calling for him to step down. Even the new Chancellor of the Exchequer, Nadhim Zahawi, only appointed twenty-four hours earlier, has agreed that it is time for Johnson to leave.

The 1922 Committee, which decides the rules under which the Parliamentary Conservative Members act, has hinted that at its next meeting it may consider changing its rules to allow for more than one vote of confidence a year to take place as is the case currently.

Johnson remains defiant, commenting that he will still be leader at the time of the next General Election, a claim which now appears ludicrous given his crumbling support.

Michael Gove, the levelling up minister, was dismissed from his post yesterday for disloyalty. Gove was one of the most senior members of the cabinet, and his departure will further weaken Johnson’s position.

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There were comments made from both sides of the political spectrum that support the UK’s departure from the EU and confirm that neither future Conservative or Labour Governments would seek to rejoin.

The leader of the opposition, Sir Keir Starmer, spoke of the need for the UK to move on from the arguments of the past, that the country would remain outside the single market, customs union and the free movement rules.

Starmer received stinging criticism from members of his own Party, who favour an attempt by any future Labour Government to rejoin.

While there is little doubt that Brexit has contributed to the current economic slowdown, it is not the dominant feature. The inability of supply to keep up with demand comes from further afield than Brussels.

Jacob Rees-Mogg, the Brexit Opportunities Minister, spoke on radio yesterday of the missed opportunities for the country to benefit from its departure from the European Union. It is obvious that dealing with the Pandemic had to receive top priority as the Government dealt with the effect of Covid-19.

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While the Fed acknowledges that Jerome Powell may have been a little flippant about rising inflation, the FOMC have actually taken significant steps to rectify his error.

This in contrast to the Bank of England, which has agreed that it underestimated the rate at which inflation would accelerate, but has made no significant effort to rectify its error.

To many observers, the MPC appear to remain unsure about how it can tighten monetary policy without tipping the economy into recession.

Its series of dovish hikes have had no significant effect on the rise in inflation and while it is clear that the supply side of the economy cannot be dealt with by hikes in interest rates, the demand side certainly can. However, the drip drip of twenty-five basis points coupled with dire warnings from the Bank’s Chief Economist are unlikely to have the desired effect.

This is particularly true when Huw Pill holds his hands up to being the person who didn’t see inflation rising as fast or as far, and he and his department told the MPC so.

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The pace at which prices of essential foodstuffs are rising has reached unprecedented levels as demand continues to outstrip supply.

Having emerged from the Pandemic, no one in authority had any idea just how seismic the effect on supply chains would be.

It was obvious that during the Pandemic there would be severe difficulties, but there has been a perfect storm of events that have left the UK weak and open to a downturn that could see a bona fide recession that will see the Central Bank’s hands tied as inflation continues to rise.

No one, outside a few Government departments, will have been aware of the incredible reliance that has grown on the supply of several staples produced by Ukraine, while Russia has been slowly building a reliance on its energy supplies almost under the radar.

There have been concerns raised about how Russia has been playing the long game, building its influence across Europe. The build-up of troops along its border with Ukraine was dismissed as little more than a show of strength, until it advanced into its former satellite a little over four months ago.

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The rather unedifying sight of Criminal Barristers taking strike action in support of a pay-claim illustrates perfectly the pace at which inflation has risen and how wages have been left behind.

It is becoming clearer every day that the UK is becoming stuck in a vicious circle of rising inflation being chased by rising wages. Once this becomes embedded in a society, it becomes difficult, almost impossible to turn around.

Every day recently, newspaper headlines have shouted about another sector of the economy taking action to try to not only catch up, but try to get ahead of raging inflation.

There is an entire generation that has never experienced prices rising at such a rate. Even those who lived through the 1970s are surprised how visible rising prices in shops are. Everyday items, bought regularly, are seeing prices increase at every visit to the supermarket.

The most significant difference which was touched upon yesterday is the fact that the labour market is tight and getting tighter. Having said that, while Brexit is not the most significant contributor to the slowing economy, it clearly is having an effect on the labour market.

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It has become very convenient for Brexiteers, now renamed Rejoiners, to blame the current slowdown in the economy on Brexit.

That position doesn’t consider that first the EU economy is suffering at least as much as the UK currently and, in any event, two of the most serious issues, energy shortages and supply chain issues that include transport of foodstuffs from Ukraine have no basis in Brexit.

Furthermore, it is only a matter of time before the European Union begins to pressure EU members who are not Eurozone members to either join or leave.

Catherine Mann, a member of the Bank of England’s Monetary Policy Committee, decided to use a speech she made last week. To broach the subject of inflation becoming embedded in the economy.

With Railway workers striking to support wage demands and other industries also considering industrial action, Mann may be right that inflation fuelling wage increases are set to be a significant factor in the Bank’s considerations going forward.

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It is said that one of the reasons that Boris Johnson was able to cling onto power following a recent vote of confidence was the fact that MPs believed he had a golden touch when fighting elections.

That appears to have now deserted him as well, as the Government lost the two by-elections which were held yesterday.

The first to declare was Wakefield in Yorkshire, where the seat was won back by the opposition Labour Party, who lost it in the general Election.

While this defeat will have stung, it is the kind of result that happens in mid-Parliament and wouldn’t normally have caused too much of a stir given that the turnout was just 39%.

The far more significant result was the Liberal democrat victory in Tiverton and Honiton in Devon. Turning over a 24k majority to lose by a little over six thousand votes will send shockwaves through Westminster. The Liberal Democrats have now taken three seats from the Government in the past six months.

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Data published yesterday confirmed that headline inflation in the UK continues to rise, but the rate of increase may be slowing.

The consumer price index rose by 9.1% year-on-year in May, following a rise of 9% in April.

In her speech earlier this week MPC member Catherine Mann argued that every one percent rise in U.S. interest rates will see the pound devalued by 4.5% over a two-year period, and add 0.5% to UK inflation.

Given that the Federal Reserve is committed to continuing to hike rates in ever larger increments, the Bank may need to keep pace unless it decides that any support for the pound would be futile given the still painful memories of 1992.

In what looks like becoming an ongoing discussion, the Bank of England’s Chief Economist disputed Mann’s claim, commenting that raising interest rates at a faster rate wouldn’t help Sterling.

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Yesterday saw the largest strike take place in the UK since the 1970s. Boris Johnson, who is a great admirer of Margaret Thatcher and her policies, will get the chance over the next few weeks or possibly months to emulate her as the country looks like it could easily erupt into a class war of industrial action.

Rail workers have agreed to return to talks today as the first of three days of official action took place. The strike brought the country to a virtual standstill and the public face further disruption when the second and third days of action take place tomorrow and Saturday.

Strikes by rail workers may be the thin end of the wedge for industrial action, with rumblings coming from teachers, while the health unions are also considering a vote on strike action.

When the current Government was elected two and a half years ago, it seemed to have policies that could unite the country, as it promised to level up the geographical and social landscape to make the country a fairer place to live.

In contrast to its promises, the UK is now more divided than it has been since the miners strikes of the early 1980s. From the disregard for the rules illustrated by the partygate scandal, the Thatcherite policy of allowing the sale of council houses, and the deportation of illegal immigrants to Rwanda, the Government is in danger of becoming totally detached and wasting the opportunity it was given by achieving an eighty-plus majority.

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The Bank of England has admitted that it got its call on inflation woefully wrong at the turn of the year and should have reacted faster in tightening monetary policy as the country began to emerge from the Pandemic.

It was natural to assume that a spike in inflation would happen as demand hugely outstripped supply, but it was expected that this would level out as supply chains became untangled.

Catherine Mann, one of the independent members of the Monetary Policy Committee, spoke yesterday of her fear that inflation is becoming embedded in the economy as rising inflation is causing wage claims to increase, which in turn creates further price increases as real incomes deteriorate.

Mann is particularly concerned about the effect on Sterling should the Bank fail to keep pace with the rate increases that are taking place in other G7 economies. Were the currency to come under pressure, that would add another factor to rising inflation.

In order to avoid a rise in what she terms, domestic inflation, Mann favours a fifty basis-point increase in short term interest rates at the next MPC meeting.

Beyond Currency Market Commentary:

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