Belfast Telegraph

Friday 1 August 2014

'The squeeze will continue, but there is a more positive picture to be found'

Inflation is pretty bad, and it is almost as though the Bank of England has given up on what was supposed to be its principal objective: it now does not expect inflation to get back to the 2% mid-point for another two years.

 Part of the reason for the adverse outlook is what is called administered prices: prices that are set by government policy rather than market forces. Thus the increase in university fees has pushed up overall education costs by some 20%. The environmental costs heaped on to our utility bills have increased these over and above the wholesale cost of energy.

You may or may not approve of the rise in university fees or the Government's environmental policy but the Bank calculates that these policies are adding about 1 percentage point a year to inflation and that this effect will continue for the next few years. So were it not for government policy, inflation would be below 2% and living standards, instead of falling or at best being stagnant, would be starting to nudge up.

So can living standards rise against such headwinds? Sir Mervyn King was suitably downbeat about the prospects, and separate figures showed living standards are now back to the level of 2003. Looking at the overall numbers I think there is no question that the squeeze will continue for a while yet.

But if you look hard enough there is a slightly more positive picture to be found.

Both household consumption and total real household resources have started to push up. This rise may come from more people working, or working longer hours, or from lower mortgage costs, rather than increased pay. But it has enabled consumption to climb a little.

What also seems to be happening is that the retail sector has responded to the squeeze on incomes by cutting its costs, running special incentives, and generally coping in a sensitive way with the fact that many customers are struggling.

Meanwhile, as resources have increased people have decided to set aside some of the cash for savings, which are now much higher than they were during the boom years and back to 1997 levels. You could say that we have as individuals corrected the errors we made during the boom. The bad news here is that many people will have to save for several years to get debts under control. The good news is that in total we have got savings back to a reasonable level.

There are other chinks of light. Retail sales are not bad, in January up nearly 2% year on year. Car sales were up 12% in January on the previous year, which is pretty stunning. House prices remain broadly flat but there was a big rise in first-time buyers. Shares continue to climb, which must have some feed-through into final demand.

And as is now generally recognised, employment is still climbing and unemployment falling, notwithstanding the dire predictions of some commentators. It is at best an uneven performance. But it is not a dreadful one.

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