Families were today warned that that the squeeze on their living standards will last for at least three more years.
The Governor of the Bank of England Sir Mervyn King said there was little sign of respite before 2016. Wages are stagnating while inflation is staying “stubbornly” high, fuelled by rising food, transport and utility bills.
New official figures show that the financial crisis has already sent living standards back to those last seen in 2003 - the first time on record that real wages have dropped so far.
The Governor also suggested that efforts to kick-start economic growth through relaxing austerity measures were almost certainly “doomed to defeat”. But he offered a glimmer of hope that economic recovery was “in sight”.
In a new forecast the Bank said that inflation was now expected to rise to 3 per cent this year as a series of “own goals”, such as above inflation train fare increases, eat into household budgets. The renewed weakness of sterling is also expected to feed through into higher shop prices.
The Governor said it was not possible to give a “definitive prediction” on when the squeeze on incomes, which began in 2009, would come to an end.
Sir Mervyn, who steps down to make way for Canadian Mark Carney in July, did little to hide the reality of a further grim slog for the economy over the coming years before any chance of a full recovery. He said: “The prospect of a further prolonged period of above-target inflation must therefore be considered alongside the weakness of the real economy.
“Attempting to bring inflation back to target sooner would risk derailing the recovery and undershooting the target in the medium term.”
Economic growth will return in a “slow but sustained recovery” he said, but with the risk that it could be halted by a return to chaos in the eurozone. The level of GDP is not expected to return to levels seen before the collapse of Lehman Brothers until 2015.
Sir Mervyn added: “The UK recovery is set for a recovery but that is not to say the road ahead will be smooth. This has not been a normal recession and it will not be a normal recovery.”
The stark forecast is a blow to George Osborne as it means millions of families will be seeing their living standards continue to fall at the time of the 2015 election. The Chancellor was in Eastleigh today visiting a factory in the run-up to the by-election.
TUC general secretary Frances O’Grady said: “Official figures now confirm what everyone knows. Living standards have been falling for the vast majority, and there is no sign of change. But on top of the wage squeeze, the Government has been making it worse with cuts to tax credits, the freeze in child benefit and a VAT hike.
“Millions of low-income families —both in and out of work — are now threatened. The cost of living goes ever upwards with the costs of essentials such as food, fuel and energy continuing to increase.” A Labour spokesperson said: “The Government’s failing economic policies and unfair choices are making things worse not better.
“Our flatlining economy means wages and living standards are being squeezed.”