As a sullen Conservative party resumed its favourite displacement activities this week – arguing over the entrails of Boris Johnson’s political career while taking chunks out of the civil service – few were paying attention to the only graph that matters in British politics

The cost of government borrowing – a measure of whether global markets trust Britain to pay its obligations – climbed to within a whisker of the worst levels seen after Liz Truss’s mini budget last Autumn.

This lunchtime 10 year gilt yields were around 4.35%, after higher than expected inflation figures led to the second biggest one week rise since the 2008 financial crisis.

During the Truss era, it peaked at 4.54% after the biggest one week rise. For four of the last five years, this measure was below 1.5%.

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The likely political knock on is enormous: interest rate rises – possibly peaking at 5.5% by November – meaning the horrific spectre of millions enduring yet higher mortgage rates and possible further financial instability.

City economists are utterly aghast by how bad things have got. Yet in the sunniest week in Westminster this year there was absolutely no sign that the political class realises storm clouds approaching, as it obsessed about Suella Braverman’s driving record and what exactly Johnson got up to in the pandemic.

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Instead the prime minister was sitting on the This Morning sofa, briefing the country about his Jilly Cooper reading habit while batting away questions on another political firestorm: record immigration figures.

There is no easy answer to the latest challenge Britain faces.

After Liz Truss’s mini budget rocked the markets she sacked Kwasi Kwarteng as Chancellor and reversed the measures that got her into trouble, herself then succumbing to the men in grey suits days later and things calmed down.

This sort of quick fix to the squeeze on borrowers and homeowners is simply not available this time round, amid signs the government and Bank of England have begun to pull ominously in different directions once again.

The Treasury wants the Bank to raise interest rates to get inflation down, yet a fall in the government’s energy price cap will boost disposable incomes and bring inflationary pressures.

Government borrowing is set to rise relentlessly after Chancellor Jeremy Hunt chose to keep spending taps open and delay Whitehall budget squeezes until after the next election. Meanwhile many Tories are still demanding a tax bonanza giveaway ahead of that election. What does Tory economic policy look like any more?

Markets see hesitation. One City figure told me traders are studying the lessons from crises in emerging markets to ascertain what could happen in the UK if things go very badly wrong.

Trapped by circumstance, this left Chancellor Jeremy Hunt having to tell Sky’s Ed Conway today his preference is for a recession over inflation – a stark, bleak message just 17 months out from a likely October 2024 election.

But other Tory sources worry this comment pulls back the curtain on an even bigger strategic problem the Sunak government has created for itself.

At the heart of Sunak’s pitch for re-election is his five pledges, yet here today on Sky News, Hunt appears to be acknowledging you that the two economic priorities contradict themselves – and in a runoff between the need to reduce inflation (pledge 1) versus the desire to create growth (pledge 2) the Chancellor prioritises the former.

Privately allies admit this contradiction is real given the current economic climate, just at a time when they’re struggling to convince people they will meet two other promises; to reduce NHS waiting lists, (pledge 4) and stop the boats (pledge 5). Just one more major headache, on top of several others, in a month that has seen the political wind change decisively.

Obscured by the Coronation of King Charles but increasingly evident this week, the disastrous Tory local election results last month have prompted a sweeping change in the outlook of the Conservative Party about its prospects at the next general election.

Before the council elections, Tory MPs thought industrious, sensible Sunak, with his Brexit deal, self discipline and work ethic might just be an electoral saviour.

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Hunt: Inflation fall not ‘automatic’

In large parts of the parliamentary party that hope appears to have evaporated, disappearing at close of polls on May 4, as optimism dissolved and a toxic torpor set in, as they were forced to confront a set of results which, if replicated, would see Sunak ejected from No10 with ease by Labour next year.

“There is an element of people losing motivation and thinking ‘what’s the point’,” one Conservative MP told me today.

Another well connected Tory said that post local elections the mood is bleak and that “now, more than at any point since the Truss premiership, MPs think we’ve lost the next election. ‘Managed decline’ is the most common term I’ve heard.”

In the week that saw net migration breach 600,000, a new record, Tory MPs found it painful to watch Keir Starmer outflank them with a promise to end current rules allowing companies to pay migrant labour just 80 per cent of the usual rate for a job in certain “shortage occupations”. At the same time Tories watched as Sunak junked their own 2019 manifesto pledge to lower overall migration.

‘Listlessness all over Westminster’

A listlessness can be detected all over the Westminster postcode. One official reports their Secretary of State working at less than full capacity.

Business is sparse in the Commons, with one vote pulled this week because Tory whips said the House was not quorate. Anticipating 16 months until the general election, another official says they are “so bored already (with) so little work to do”.

Animal rights legislation aimed at banning live exports was dropped to avoid a politically damaging vote on hunting – prompting questions about why they went to the enormous effort of drawing it up in the first place.

Sunak now oversees a government that has neither the spare cash, nor parliamentary time, nor internal political support after years of Tory wars to do anything new complex or difficult.

In the face of all this, however, Sunak is pressing on and is working up a plan.

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Remarkably, Number 10 itself remains broadly united under the pressure, and nor is there a meaningful appetite amongst Tory MPs to unseat him.

A tight knit political team is working more harmoniously than their equivalents under previous prime ministers. Officials enjoy working for Sunak after years of instability.

While Sunak can be “a little more tricky” on the one or two days a week he fasts as part of his diet, this is nothing compared to the challenges caused by his predecessors.

“They know this moment would come where they’d have to hold their nerve and they’re doing that,” says one, although others think this makes Number 10 too cliquey. “Genuinely they’ve drunk the Rishi Cool aid so much they never think he’s wrong, they don’t ever think they’ve lost. It’s a little delusional” commented one waspish Tory..

‘Three-prong plan of attack being considered’

Inside Number 10 a three-prong plan of attack is being considered.

The first is to double down on the five pledges, throw more effort into achieving them and start to set out a future vision. “There needs to be some hope for the future,” said one source, as election strategists weigh how they balance calls for change and more of the same after 14 years of Tories in Downing Street.

The second is a bold reshuffle, possibly in September, signalling a reset a year out from the election campaign. MPs tell me Number 10 make little secret of which cabinet ministers are out of favour.

Home Secretary Suella Braverman may have survived the week, but one Tory MP said that, “No10 and whips didn’t come to her defence” in private. She is near the top of those who could be axed.

MPs also question Number 10’s level of support for Kemi Badenoch, the business secretary, Therese Coffey, the environment secretary and Steve Barclary, the health secretary – the only question is the level of political capital they have at the time to force through these difficult moves.

Sky News understands there was a conversation around two months ago about whether it might be sensible to move Jeremy Hunt, after some senior figures felt the Budget was lacklustre.

Sunak, who had been concentrating on the Windsor Framework and meeting President Biden in San Diego, played less of a role than the Autumn statement.

The result underwhelmed some allies of Sunak, but Hunt is now overwhelmingly likely to stay in post to the election. Downing Street will deny any such conversation about moving the Chancellor took place.

The third part of the plan would be to use the King’s Speech to try and back Labour into a corner.

King Charles’s first address would be bills less designed to be law, more drawn up to force Labour into politically inconvenient votes on subjects which could include the unions and women’s rights.

It is a move redolent of the sort of political trickery loved and deployed by ex Chancellor George Osborne whose ghost appears alive in this Downing Street through the actions of the Osbornite political secretary James Forsyth.

Whether the new team at Buckingham Palace are willing to go along with this plan for what effectively would be a highly political King’s speech remains to be seen.

As parliament enters recess, with all the troubles swirling it would be too glib to say we have just passed the month that showed the Tories are likely to lose the next election.

Labour may yet implode under the pressure of hammering out specific policies and slogans ahead of their delayed October conference.

The 35% of 2019 Tory voters who say they don’t know what they’ll do at the next general election may return to the Conservatives. There may be unknown unknowns. At this point, polling and logic suggests they may be the Tory’s best hope