UK: Why Our Purchasing Power Is Set To Suffer The Biggest Squeeze Since 1870

See also:

On Mervyn King’s Apology That Central Banks Are Destroying The Middle Class’ Standard Of Living

Bank of England’s Mervyn King Warns Inflation Could Reach 5 Percent Within Months

UK: Interest Rates ‘Will Have To Rise Sixfold in 2 Years’ to Cope With Rising Inflation

And no it will not get better. You are living in the ‘good old days’ right now.

Why our purchasing power is set to suffer the biggest squeeze since 1870 (Telegraph):

Low or no wage increases coupled with rising taxation and inflation mean most people’s purchasing power is set to suffer the biggest squeeze since the 1870s, a leading economist claims.

Roger Bootle’s bleak analysis follows similar views expressed earlier this year by Mervyn King, Governor of the Bank of England, but Mr Bootle – economic adviser to accountants Deloitte – goes even further.

Whereas Mr King said the redution in purchasing power was the worst since the 1920s, Mr Bootle reckons Britons have not suffered anything like it for nearly 150 years. He predicts that for the next year many members of the ‘squeezed middle’ and others will feel like ‘new Victorians’ as meagre increases in wages are insufficient to keep pace with rising taxes and prices.

On a brighter note, real incomes should be rising again by the end of 2012. But there is more belt-tightening to come before we get there, Mr Bootle explained: “A number of factors will maintain the downward pressure on household incomes in the near-term. For a start, pay growth is unlikely to catch up with inflation any time soon. Inflation is heading towards – and possibly above – 5pc.

“An additional reason to be pessimistic about the outlook for household incomes is the deepening fiscal squeeze. Admittedly, there have recently been some not insignificant tax giveaways, including the rise in the personal income tax allowance. However, the net effect of this year’s direct tax changes will still be to reduce household incomes.

“Lastly, the labour market outlook provides further cause for concern.  I still doubt that the private sector can compensate for the cuts in public sector employment – which is already falling by 100,000 a year.

“The upshot is that I expect households’ disposable incomes to fall by about 2pc this year in real terms – equivalent to about £780 per household. And it will take until 2015 or so for incomes to get back to their 2009 peak.”

However, had the Government not taken tough action to get public finances back into better shape – including raising taxes and cutting expenditure – Britain would be unlikely to enjoy interest rates at today’s current historic low rates. These have helped maintain household spending power – at least for those with mortgages – despite the dismal economic backdrop. And one of the very few economists to predict that rates would stay so low for so long was Mr Bootle.

He forecast two years ago that rates would stay low for five years. Savers, who have suffered rather than benefited from the Government’s negative real interest rates policy, could be forgiven for hoping Mr Bootle is not proved right again when the Bank of England monetary policy committee announces its decision on bank rate this Thursday.

By Ian Cowie Your Money Last updated: May 3rd, 2011

Source: The Telegraph

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