11 Oct 2011

Big Squeeze ‘coming to an end’ says BoE governor

The poverty projections released by the IFS and the Joseph Rowntree Trust today are pretty shocking. They are well-covered elsewhere. I would point to two things. One in four children are set to be living in absolute poverty by 2020. The Coalition inherited about one in six children in absolute poverty. the Government’s target under the Child Poverty Act is one in twenty by 2020. One other fact – a million more childless adults in poverty in the coming decade. This is a group not supported by policies aimed at buying the votes of pensioners and parents.

However, let me focus on the more general issue: living standards and the squeezed middle. The IFS poverty projections are underpinned by the appalling squeeze on living standards right now. A 7 per cent fall is the sharpest general squeeze for three decades. The Bank of england has a measure suggesting that this is the biggest squeeze since the 1920s. This is caused by a double whammy stagnant cash wages and high and rising inflation.

Again, so far so bad.

However look under the hood of the IFS numbers and others and you see some small chink of light at the end of the exhaust pipe.

The squeeze should end in a few months time. Inflation should fall back, and wages rise a little. So for those in jobs, living standatrds measured by average real wages, should begin to rise again. Don’t take my word for it. Here is Sir Mervyn King talking to me last week:

“The big impact on living standards, and it’s been a very harsh squeeze on living standards over the past two years, is now beginning to come to an end. We look forward to a period next year when we should see a return to steady but sustainable increases in real take-home pay. Inflation has been high largely as a result of influences from the rest of the world. The high oil prices, the high petrol prices the high gas and electricity prices because of high energy prices in the world. Higher food prices. We’ve also seen the effect of higher VAT at the beginning of the year.  Those things are likely to come to an end now,” he told me last week.

In fact it is an assumption like that which underpins the unfortunate rise in poverty.   Poverty is measured as being below sixty per cent of average household income.  But that is a relative measure, so it is only when average real wages pick up that poverty numbers start to increase. (As an aside, does it really make sense to have a target measure of poverty that “rewards” reductions in average real pay?)

So the squeeze is going to ease. Though not for the poor. That might have significant impacts on British politics and economics.

6 reader comments

  1. Slagella says:

    I rather take your word for something – anything! – than Mervyn King’s.

  2. muggwhump says:

    Wishful thinking from Merv I’m afraid. Printing money is inflationary and he’s just printed another £75bn which will be filtering through in the next 6 months. Adam Posen also said today that more QE is on the cards as the BoE is going to review it every month from now on.
    Also once the recovery both here and abroad starts picking up expect oil, steel, copper and all the rest to start shooting up in price again like they did last year when it looked like the world was over the worst.
    When that happens of course Merv will pop up and tell us it was ‘unexpected’.
    The routine is getting pretty predictable now, inflation rises, Merv is ‘surprised’, Merv tells us it will all be all right in 2 years time, 2 years never arrives.

    You say the squeeze is going to end, but not for the poor! Well we’re all poor now so what does that mean?

    Also the OBR has forecast that personal debt is set to rise from 160% of income to 175% if the ‘recovery’ is to be sustained. Well that is hardly a return to prosperity is it?
    Just what kind of world are the politicians and bankers creating for us to live in?
    And why don’t more of us question it?

  3. e says:

    Please stop using the ridicules phrase “the squeezed middle” it seems like you’re deliberately indulging in misinformation. A few figures wouldn’t be out of place on an economics blog, albeit at the risk of straying on to industrial relations territory, (shock horror). What wage/salary bracket are you talking about?

  4. Jonathan da Silva says:

    Why would anyone listen to Sir Mervyn King? Other than to find out who he was giving away our Capital to.

    Quite what he has on Osborne who had clearly cited the uselessness of QE.

  5. MIKEKNOTH says:

    nice one Mervyn 48 hours agoyou said things could get worse than the thirties depression
    time, perhaps that you made up your mind your confusing messages are damaging pensions due to you causing such volatility in the markets
    the squeezed middle are oone thing but more numerous are those of the squashed bottom until you help them the economy will flounder
    the squashed bottom reliant on minimum wage and benefits arte being ignored by all three major parties asthey concentrate on those they feel are more likely to vote
    food banks seem to be the fastest expanding sector

    vehement attacks on benefit claimants by the government, particularly on innocent disabled claimants have been met with silence from the Labour party, so who do those on benefits
    go to for their political representation?

  6. oxkev says:

    In relation to your aside, I think it does make sense. Most of the pay rises are going to people who are at the top of the pay spectrum. For example, if the top 5% are getting big pay rises and the bottom 50% are getting pay rises at the rate of inflation or below then it is still possible to have rising average wages whilst the low paid are still going backwards.

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