When the going gets tougher…

The governor of the Bank of England has recently warned we in the UK are living through the longest and worst squeeze on real incomes any of us have ever witnessed.

It was scarcely cheering news. For once, Mervyn King may have overdone the severity of his forecast, but he is right about the direction of travel. The squeeze is severe for two related reasons. Inflation is much higher than target. Taxes have been increased sharply to tackle the large public sector deficit. Private sector wages and salaries are rising just a little more than 2% a year. Public sector wages, which have been more buoyant, will now enter a period of pay freeze. Meanwhile, the Retail Price Index has shot up by 4.7%. The governor expects more rapid inflation in the early m...