Britons living standards will fall

A former Bank of England majordomo has warned that Britons will be going back to the seventies, and we’re not talking T-Rex albums and the upcoming Sweeney movie. Willem Buiter, one of Gordon Brown’s first appointees to the Bank, said Britons face a “painful couple of years”, and urged the Monetary Policy Committee to raise rates twice to cap inflation.

We ARE talking rising prices, contracting demand, unaffordable property AND mortgages. Most of all, we’re talking really expensive fuel. We all know about the horror of UK petrol prices: the climb in the oil price shows no signs of slowing yet (although it does show all the signs of an over inflated commodity price bubble). We also have ever mounting gas prices, a function of under supply, increased demand, and speculation by investors looking for a haven, any haven, for their cash.

As one who did his homework by candlelight during Ted Heath’s fuel crisis and 3-day week, I feel I’ve pretty much seen the worst (at least by cossetted UK standards), but even though the lights will certainly stay on, there’s no doubting how painful it will be for a generation or two used to the NICE decade and ever increasing, low cost supplies of everything. Britons living standards will fall … but it’s not just about forgoing that new iPod or changing your car. It’s a lot more basic and bloody than that.

First of all, the official inflation figures may not be as ‘fixed’ as some of the more headbanging conspiracists would have it, but they certainly don’t reflect the reality for those Britons on lower wages. Official figures already factor out interest on mortgages, but they also gloss over the fact that inflation is much higher on certain goods (petrol, butter, bread and other basic consumables) and that these basics make up a much bigger proportion of the shopping basket of those at the economic bottom. A professional earning £80,000 a year can absorb the extra on their groceries and the rest … it means less for luxuries. But a one-parent family struggling to do the budgeting on a few pounds a day will find their safety net whipped away. Inflation disproportionately targets the poor. Britons living standards will fall … but those with the lowest living standards will suffer a greater fall.

And it’s a vicious circle for the economy too. This ‘deflationary inflation’ will see spending curtailed (we cannot but spend less when we have the same wage but goods cost more) and this will hit UK companies producing services or (decreasingly so these days) goods. Britons living standards will fall then, but that will impact on the wider economy. And if UK companies are taking less in through the tills, they will start to lay people off … so expect a spike in unemployment. The one bright-ish spark is that with a weak pound and a strong euro, fewer off us will be holidaying abroad or buying imported goods, so we’ll be buying more home-produced products and services. It’s a feeble glimmer, and it doesn’t help UK’s huge electrical stores, which largely turn over cheap imported white goods and other consumer durables. Belt tightening time then … see our tips on surviving in a downturn.

Tags: Inflation, Recession, Saving Money