Reasons to be cheerful (part 1)

 

The squeeze will ease in 2012.

I've been drawing up a list of reasons to be cheerful in this last week before Christmas and that is one of the better ones.

As usual, all bets are off if the euro blows up, but if the Europeans can manage to hold on to their single currency, the average UK household probably won't get to the end of the year poorer, in real terms, than they were at the start.

In fact, there's a good chance their real incomes will have edged up.

That may not sound like much, but it would be better than 2011; and 2010.

Think about it: there isn't going to be another VAT rise and I don't expect to see another big rise in the price of petrol. In fact, I think the OBR is underestimating the possibility that oil prices will fall sharply in 2012 and 2013, but that's a reason to be cheerful for another day; I don't want to run out.

With VAT and the Arab Spring falling out of the figures, 2012 is the year when the headline rate of inflation should come tumbling down. The upshot is that incomes, especially for working households, ought to start going up.

As Michael Taylor, of Lombard Street Research points out in a recent note, it was the consumer who disappointed the economic forecasters in 2011. This time last year, independent forecasters expected private UK consumption to go up by 1.1% over the following 12 months. Instead it fell, by roughly the same amount.

Part of the blame for that might lie with the chancellor, but most in the City would put it down to inflation, which also came as a rude shock to the forecasters, not to mention the Bank of England and commentators like me.

At the end of 2010, the consensus was that the target measure of inflation would be 2.7% in the last three months of 2011. Instead, it was nearly two percentage points higher. Households couldn't buy more stuff, because they were finding it hard enough to buy what they did before.

With a fair wind from across the Channel, that should change in 2012. Though don't get too excited: we're not talking about a big rise, and we're probably not talking about the next six months.

Michael Taylor now expects consumer spending to rise by 0.1% in 2012. The consensus is for it to grow by all of 0.4%, but there's going to be a big difference between the first and second half of the year.

We'll probably continue to feel poorer until the summer, because it is likely to take that long for inflation finally to fall below the rate at which cash incomes are going up.

On the World at One today, a deputy governor of the Bank of England, Charlie Bean, put a date on it. "Around the time of the Olympics", he said, the squeeze would start to ease and "people might start feeling better about things".

It's not much, but it's a start.

I'll have another reason to be cheerful tomorrow.

 
Stephanie Flanders Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
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    Comment number 108.

    64.MDHeHe
    2/ Lower oil prices are a *bad* thing as they encourage carbon emissions, which drive climate change, which will have a much worse impact than recession.
    ~~~
    If carbon emissions were a real problem, Govt would be doing everything possible to reduce instead of increase them.

  • rate this
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    Comment number 107.

    re #83
    For a guy not in the first flush of youth, who ought to know the downsides of inflation, Charlie Bean is dead keen on the stuff.

    Is he a property and/or land speculator?

  • rate this
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    Comment number 106.

    On the EU/Euro front, people (as do some posters here) will start to question received wisdom that world will end, all trade stop and all money in Europe vanish if the Euro comes to an end or some countries leave.

    We may see some more folk question the status quo but do something rather more practical than the Occupy protest. There may be pressure on the CoE to increase higher tax rates.

  • rate this
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    Comment number 105.

    The rail and bus fare increases that will appear in January will eventually hike the inflation numbers that may drop a little for that month thanks to Jan sales from retailers that remain in business. But I think we may see one or two casualties in retail early in the new year and post-Christmas jobless will rise as temp workers are laid off.

  • rate this
    0

    Comment number 104.

    #100 fatcatboys
    "Private debt is 400% of GBP"

    Total debt (pub & priv) is 490ish%.
    That's a good reason why currently the private sector are scaling back spending to pay off their debts. This reduction in spending and consequent reduction in demand can be offset by government spending softening the recession. The government can fund with unusually low bond auctions and pay off in the medium term.

 

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