Static incomes + inflation = falling living standards

via JRF – Combined Feed by Donald Hirsch

Why should we get so worried when the Governor of the Bank of England makes a modest adjustment in his inflation forecast, guessing that prices will rise by around 3 and then 2.5 per cent in the next two years, rather than about half a per cent more slowly?

Before the present economic downturn, most people would not have expected this to make much difference to their lives, partly because earnings or benefits were expected to rise at least by inflation. But today, where so many incomes are static in money terms, every percentage point rise in prices can represent a one per cent fall in living standards.

The link between inflation and falling standards of living has been particularly strong for people getting their income from public sources, since deficit reduction is being achieved partly by rigid cash limits. Public sector workers are undergoing a three-year pay freeze, which will see the real value of their pay shrink by over 10 per cent. And from this year, people on benefits and tax credits will see their income from the state rise by a fixed 1% a year for three years, regardless of level of inflation. In both cases, the faster prices rise, the harsher the real-terms cut will be.

Continue reading and despair!

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