The Coming 20% (Or More) Decline In Living Standards

Since last week’s shock announcement of a fall in fourth-quarter GDP, the Government has found itself unexpectedly on the back foot in the debate over austerity. The news yesterday that service industries rebounded strongly last month, as the snows melted away, will go some way towards evening things out. But it will be at least a year before we can say for sure whether the Coalition’s bold experiment in fiscal consolidation is undermining or supporting the process of economic renewal.

Would that this faintly tired debate was all we had to worry about. Behind the all-consuming focus on the ups and downs of the monthly growth surveys, there are much more momentous developments afoot, and they don’t bode well. After the credit-fuelled excesses of the past decade, a daunting process of transition awaits the British economy, of which the fiscal consolidation is only a part. If, by the end of it, we’ve managed to limit the decline in relative living standards to 10 per cent, we’ll have done well. It’s much more likely to be closer to 20 per cent. And while the amount that the economy grows in the meantime will obviously affect the size of this squeeze, it can’t eradicate it.

Let’s start with prices. According to yesterday’s UN figures, world food prices rose to another record high in January, up 3.4 per cent on December’s. Fed by explosive growth in demand in the developing world, the costs of fuel, metal and other commodities are following a similar trajectory.

The effect is to create what, for the West, is a quite unfamiliar phenomenon. Inflation is rising, even though the “rich” economies remain profoundly weakened, with abundant spare capacity and surplus labour. For the first time in living memory, America no longer determines the nature of the commodities cycle. The West is out of kilter with the rest of the world, and with little ability to force through wage claims that match inflation, many of its citizens are finding that their living standards are deflating accordingly.