Inflation pushes take-home pay to pre-recession levels

Rising prices have apparently left us 5% worse off than in 2009 - but the MPC's Adam Posen insists inflation will be back below target in a year...

by James Taylor
Last Updated: 19 Aug 2013

We've heard many tales of woe from the high street lately about consumers tightening their belts in the face of the Government's austerity measures. And a new study commissioned by the BBC suggests we have every reason to do so: apparently, the average take-home pay in the year to 2011 was £20,149, which when adjusted for inflation is effectively £1,088 less than two years ago. So, in real-terms, wages have fallen by 5% since 2009 - a fairly stark indication of the impact of rising prices. For what it's worth, Monetary Policy Committee member Adam Posen continues to argue that inflation will fall back to 1.5% by the middle of next year - although admittedly he remains in the minority...

In fact, according to the research, which was carried out by the Centre of Economics and Business Studies (based on salary data from automated payments company Vocalink), average take-home pay isn't just lower than it was in 2009 - it's lower than it was way back in 2004. Those suffering the most are staff in the banking industry, who are apparently worse off by £101 a month (a reminder that we shouldn't condemn a whole industry based on the excesses of investment bankers), followed by those in the construction industry, who are £99 a month worse off. With prices rising across the board, and wage growth still pretty stagnant, it's not really a surprise that most of us are feeling a little poorer than we did a couple of years ago.

The question remains, of course, whether the Bank of England should be doing to more to try and get inflation under control. So it's interesting to read Adam Posen's Guardian interview today, in which the MPC's arch-dove argues that the underlying weakness of the economy will drag inflation back below target in the second half of 2012.

Posen’s take is that you can’t say the economy is overheating simply because there’s high inflation. And he reckons the more tentative, wait-and-see approach to raising rates is fine given that, in his view, we're not currently at risk of an inflationary spiral. The snag there is he’s the only one on the MPC who’s saying so. Three of his peers voted for higher interest rates this month.

Posen added that the government's austerity plans, higher taxes and reductions in public spending would have a ‘meaningful’ dampening effect on consumer spending and overall demand in the economy. Consumers were more likely to rein in their spending than to dig into their savings, while trade unions are too weak to bargain for better pay. ‘Wages will be the dog that doesn't bark,’ he said.
Posen also said he’s been lying awake at night thinking about the issue. If he’s right, inflation won’t be a problem next year, and he’ll be able to get a sound kip finally. Yet when he’s the only one on the MPC who thinks so, there may be sleepless nights ahead...

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