Bank of England governor Mervyn King has said that a squeeze in living standards is the inevitable price to pay for the financial crisis and the recovery of the UK and global economy.
Speaking in Newcastle last night, King said that 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 the UK since the 1920s.
King said that the UK was set to see inflation rates jump to between 4 and 5 per cent 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 BoE 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 per cent in December 2010, with higher import prices due 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 BoE had tried to counteract the rising prices by raising interest rates, it would have led to falling wages.
Earlier in the day the Office for National Statistics announced a shock 0.5 per cent contraction in the UK economy in the final quarter of 2010, something many experts have said will delay any plans by the BoE to raise interest rates.
King said he disagreed with the Government’s view that the figures were due 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.”