Yesterday there was the surge to 3 per cent in the consumer price index, with the retail price index up to 4.2 per cent, and the evidence from the Royal Institution of Chartered Surveyors that the house price decline was spreading. The Council of Mortgage Lenders also revealed that in the first three months of this year there had been the lowest number of housing transactions since 1975.

These followed really dreadful figures on producer or wholesale price inflation, up 6.2 per cent, and evidence from the British Retail Consortium that sales had fallen for two months on the trot. And now we know from a junior minister's briefing papers that the Government reckons that house prices will be "at best down 5-10 per cent year-on-year".

Set alongside this, what the Chancellor does or does not do on the 10 per cent tax band is irrelevant. It matters politically and it matters to the people who have been disadvantaged, but as far as the economy is concerned it has no overall impact. There is inevitably a political dimension to what happens to the economy because Gordon Brown made the quest for economic stability his mantra. But to see a surge in inflation as bad news for the Government is a bit silly. Of course it is bad news for the Government but it is nerdy to worry about that. What matters is that it is bad news for us.

How bad? There is a short-term issue and a longer-term problem. The short-term issue is that inflation officially at 3 per cent makes it very difficult for the Bank of England to cut interest rates. You have to say "officially" because the CPI is a very odd index (it does not, for example, properly include housing costs), and there is a recipe for distrust in government having an index that does not correspond to people's experience. The RPI is more representative and is used for fixing government benefits, many private-sector pensions, and the return on index-linked government securities. But even it fails to distinguish between things that people have to buy or pay for, such as food, fuel and council tax, and things they choose to buy, such as a TV or a pair of shoes. The "must-buy" items are shooting up in price, while many of the "nice-to-buy" things are still coming down.

But even if you accept the official data, which the Bank of England has to do, there is still a dilemma. Were the CPI to go above 3 per cent and stay there for two months it would have to write a letter to the Chancellor explaining what it was proposing to do about it. At the moment the CPI is at 3 per cent, not above it, but it seems likely to go above it next month and with global energy and food prices still rising, it may well stay there.

The financial markets think so: Barclays Capital, for example, reckons the CPI will be at or above 3 per cent for a year. You could say a letter is only a letter but that misses the point: unless the Bank is seen to be leaning against inflation the country slithers back towards the monetary ill-discipline that the country suffered from in the past. There was a reason for inflation targets and the independence of the Bank.

Yet were inflation under control there would a strong case for cutting rates. Economic growth is weakening, though for the time being the economy is still growing. And, as we all know, the housing market is in a lot of trouble. You could not, nor should not, expect the Bank to control house prices. But it would make sense for it to try to soften the decline by reducing the overall costs of borrowing. In popular parlance it should seek to engineer a soft landing; right now we seem to be heading for a hard one.

But it would be very difficult to cut rates now. Ahead of these figures I had expected a further cut next month; now, unless something very surprising happens, we are looking at the autumn at the earliest. As for the housing market, as the civil servant who wrote the housing minister's notes says: "We cannot know how bad it will get." (By the way, the drafter of her notes deserves an alpha for clarity, brevity and directness – there is a good journalist in there.)

If the Bank's dilemma is the immediate issue that we just have to scramble through over the next three or so years, the longer-term problem will grind away for a decade or more. We are accustomed to a world where natural resources are reasonably plentiful and reasonably cheap. Within the West we have until recently had an increasing workforce. And we have had steady gains in productivity. As a result, living standards have risen pretty steadily every year, with only occasional blips during global downturns.

We are now starting to see a different sort of downturn. We cannot assume that natural resources will be either plentiful or cheap, given the growth that is taking place in the developing world, particularly in China but also in India. We won't have an increasing workforce for much longer – in Germany it is already shrinking – and that smaller workforce will have to support a growing number of pensioners. And while it should be possible to keep increasing productivity, it will be much harder to do so as the weight of our economies shifts from manufacturing to services. You can run car plants with fewer people and still produce good cars but it is hard to runs schools, hospitals and care homes with smaller staffs, or at least to run them well. Something has to give, and that something is the rate at which living standards can rise.

So this downturn, which so far is not a serious one at all, is already squeezing real incomes. That is why people feel ratty. They – we – instinctively blame the Government and it is fair to say that thanks to Gordon Brown's excessive spending in recent years the country is not in as good shape to meet this downturn as it was in the previous cycle.

If the economy slows sharply later this year the budget deficit, already around 3 per cent of GDP, will shoot up and I really don't know what the Government will do about it. But even if we were in good shape to meet the downturn, the longer-term grind will continue. We have to spend a smaller proportion of our incomes and save more. That is why Brown is seeking ways to make people save more for their own care should they need to spend their final time in a nursing home. It is also why the next government will have to try to rebuild the private-sector pension system after the damage of recent years.

This is all fixable. But it is only fixable by persuading people to accept a slower rise in living standards, by retiring later, and by saving more. There is a squeeze on now and that squeeze will intensify in the coming months. My own concern remains that next year will be more of a problem than this one. I don't think we should assume that we will bounce out of this slowdown quickly. Things will not become nearly as bad as the 1970s but there will be a slog ahead.