The British Government wants this year to be about bringing down the cost of living. However, it has not been a good start to 2026. This week, Chancellor Rachel Reeves received two pieces of bad news. The first was data showing that wage growth has slowed by around a fifth since last January. Then, yesterday, it was reported that inflation has risen to 3.4%, the first increase in five months.

Keir Starmer’s Labour is making a huge bet on its ability to make people feel better. Reeves has put aside £13 billion over the next three years for giveaways to “put more pounds in people’s pockets”, including £5.4 billion this year alone. But that doesn’t help much when inflation is pushing prices higher.

Since the financial crisis, Britain has slowly been pulled deeper into an inflationary whirlpool caused by its widening trade imbalance. Before the crash, financial service exports quadrupled, balancing trade and covering up the country’s growing dependence on imports of food, fuel and other essentials. Having so many large banks also carried the extra benefit of sucking in hundreds of billions of pounds from the rest of the world and depositing it into the UK, strengthening the pound and making it cheaper to import necessary goods.

Following the crash, however, the situation has flipped. Exports from financial services fell by a quarter and have been flat for nearly a decade. At the same time, the City has diminished as a financial centre, reducing its ability to suck in money from the rest of the world. Both these factors have pushed the pound, which has slumped against both the dollar and the euro, into losing over a fifth of its value around the world.

A weaker pound means higher prices in the shops for everyday essentials. Food inflation increased by 0.8% last month and has almost doubled since the financial crisis. Even clothing and footwear prices have reversed their downward trend and increased by a fifth in the past five years. Higher prices for day-to-day essentials put pressure on wages, which stokes inflation in services — the most dominant part of the UK economy.

Crucially, the country is not experiencing a wage-price spiral as it did in the Seventies. Politicians in that decade were trying to sustain the rapid growth in living standards, and allowed wages to spiral out of control. By contrast, over the past decade, real wages have risen by just 9%. The Government cannot raise interest rates because the country is heavily indebted: a different approach is needed.

The only way to bring down inflation and strengthen earnings is to boost domestic production, something which can create jobs and investment at home. Promisingly, it’s a process which some figures indicate may already be happening. Since the Eighties, Britain has lost a million hectares of agricultural production. Policymakers should consider how they can subsidise greater domestic production of clothing, footwear, cars and other essentials. We must challenge the myth that we are doomed to import these things from overseas: for example, textile production is actually starting to grow again in the UK after several decades of decline. Finally, Britain needs to develop new significant export-earning industries which can match the lost value of financial services.

If the country can take a production-based approach, it can sustainably rebuild the strength of the pound and extricate itself from the inflation whirlpool. It will also have the added political benefit of making people feel genuinely better off, rather than reliant on giveaways without lasting value. Perhaps the Chancellor could speak with a savvy politician called Rachel Reeves, who once called for a programme to “make, sell and buy more in Britain”. She had the right idea.

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Andrew O’Brien is the former Director of Policy at the think tank Demos and currently Head of Secretariat of the Independent Commission on Neighbourhoods. He writes in a personal capacity.

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