Mervyn King, the governor of the Bank of England, has said a squeeze in living standards is the inevitable price to pay for the financial crisis and the recovery of Britain and the global economy.
Speaking in Newcastle last night, King said a mixture of rising inflation and stagnant wages meant that UK wage earners were set for hard times and that this has resulted in the longest decline in take-home pay in Britain since the 1920s.
King said the UK was set to see inflation rates jump to between 4-5% in the next few months, highlighting the need to adjust to rising commodity and energy prices, before falling quickly in 2012. He also said the Bank would stop attempts to push up wages to meet those higher prices.
King said rising commodity and energy prices were one of three factors that saw inflation jump to 3.7% in December 2010, with higher import prices owing to the weak pound and the rise in VAT also to blame.
He said all three factors contributed to the equivalent of 3 percentage points to the inflation rate each year for the past four years and that without these external and temporary factors UK domestically driven inflation would be almost zero in that timeframe.
King said that if the Bank had tried to counteract the rising prices by raising interest rates, it would have led to falling wages. (article continues below)
Earlier in the day, the Office for National Statistics announced a shock 0.5% contraction in the UK economy in the final quarter of 2010, something many experts have said will delay any plans by the Bank to raise interest rates.
King said he disagreed with the government’s view that the figures were owing to poor weather conditions and that the figures backed up his assertion that the recovery would be “choppy”.
He said: “Even abstracting from the effects of snow, growth at home slowed in the second half of last year.”