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Squeeze on living standards is inevitable says Merv

“In 2011, real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.”

“The squeeze on living standards is the inevitable price to pay for the financial crisis and subsequent rebalancing of the world and UK economies.” This is according to Mervyn King, Governor of the Bank of England, in a speech made in Newcastle last night.

So everyone who is lucky enough to have a job is going to be worse off over the coming year/s (delete as appropriate). On top of this, Mr King acknowledged that savers and “those who behaved prudently” would be among the biggest losers of the squeeze. On top of this, the latest research shows that 20% of last year’s graduates were still without a job towards the end of last year and nearly half of all 16-17 year olds who have left school are without work.

This magnificent building in London is soon to be turned into a soup kitchen.

Fortunately, those who caused the crisis have their payoffs and bonuses to keep them warm, as do the regulators and politicians who were inadvertently looking the wrong way before the credit crunch happened. Meanwhile the rest of us are suffering something not seen since the Great Depression of the inter-war years.

Mr King noted that the Bank “neither can, nor should try, to prevent the squeeze in living standards.” He forecast that inflation would rise to somewhere between four and five per cent over the next few months. Higher prices, he said, are due to higher import prices caused by the weak pound; rising energy and commodity prices; and, rises in VAT – all of which the Bank is powerless to control. He said these items alone were contributing the equivalent of three percentage points to inflation.

He pointed out that the Bank could not have used an increase in interest rates to tackle inflation. He said: “If the MPC had raised the Bank Rate significantly, inflation might well have started to fall back this year, but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now.”

So, to sum up, we are between a rock and a hard place. The government will continue its austerity measures, inflation will continue to rise, unemployment will keep on growing, the Bank of England is hamstrung in its ability to change circumstances, things will keep on getting worse and we will just have to bear it.

Mr King received a standing ovation from his audience of grateful Geordies.

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Posted in Bank of England, Inflation, Interest rates, macroeconomic policy, Monetary Policy Committee

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