The Institute for Fiscal Studies (IFS) released a study on March 21 noting that the recession and recovery period in the United Kingdom from 2008-2011 marked “…the first time that incomes have fallen over a three-year period since the three years from 1990 to 1993, and the biggest three year drop in real living standards since 1980-83.” Real household incomes fell a total of 1.6% over this time whereas in “normal” periods the typical UK household experiences an average income gain of 1.6% per year.
Inflation racing ahead of wage gains was cited as one of the most important factor contributing to this historic decline. Lower interest rates for savings had a large impact on the standard of living for retirees.
Deflation on earning power and inflation in the cost of household purchases has placed a double squeeze on UK residents. In this context it is interesting to note Bank of England governor Mervyn King lamentations during last month’s conference call to defended monetary policy in the latest Inflation Report. King partially defended the on-going accomodative monetary policy in the face of inflation stubbornly above the inflation target of 2%. King asserted that the recession was going to reduce the standard of living either through deflation of wages (impact from the economy) or the increased prices of purchased goods (impact from monetary policy). In his view, this adjustment appears inevitable. However, this recent study by the IFS seems to suggest that in trying to choose the “least bad” option, the UK may end up stuck swallowing both bad options.