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.