Wednesday, 26 January 2011

12% hit to take home pay from inflation

Here are the two passages from Bank of England Governor Mervyn King's speech last night where he points out that take home pay has taken a 12% knock from inflationary pressures outside his control: costly imports, rising fuel prices and the hike in VAT this month...

"Taken together, those three factors by themselves would account for a remarkable 12% addition to the price
level over four years, or an average increase in the inflation rate of 3 percentage points a year. Since the
consumer price index as a whole rose by not much more, the contribution of domestically generated inflation
over that period was close to zero, and obviously well below the target."

"So why is there so much unhappiness about inflation at present? The answer is clear. The three factors I
described – higher import and energy prices and taxes – have squeezed real take-home pay by around 12%.
Average real take-home pay normally rises as productivity increases – money wages normally rise faster
than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and
other price rises this year, real wages are likely to fall again. As a result, 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."

He also remarked that inflation would peak next year somewhere between 4 and 5%, pushing expectations up to the 5% figure.

No comments:

Post a Comment