So why is there so much unhappiness about inflation at present?
The answer is clear. The three factors I described – higher import and energy prices and taxes – have squeezed real take-home pay by around 12 percent.
Average real take-home pay normally rises as productivity increases – money wages normally rise faster than prices. But the opposite was true last year, so real wages fell sharply. And given the rise in VAT and other price rises this year, real wages are likely to fall again.
As a result, in 2011 real wages are likely to be no higher than they were in 2005. One has to go back to the 1920s to find a time when real wages fell over a period of six years.
Speech given by
Mervyn King, Governor of the Bank of England
At the Civic Centre, Newcastle
25 January 2011