The Office for National Statistics said household spending fell 0.6 per cent in the first three months of 2011.
News of the biggest annual drop in real disposable incomes since 1977 came as Mervyn King and other senior Bank of England officials testified in front of the Treasury Select Committee, revealing a range of views on how to deal with high prices and sluggish wage growth.
“Most of us on the Bank’s committee have taken the view that to tighten policy now would risk undesirable volatility in output,” King said.
Yet deputy governor Paul Tucker made more hawkish noises than expected, rebuffing rumours that the Bank could be leaning towards another programme of quantitative easing, dubbed “QE2”.
“This is not a committee that’s drifting towards thinking that more stimulus may be needed,” Tucker said, despite the Bank’s last minutes suggesting that several members endorsed QE2 in the event that deflationary pressures emerged.
Commenting on a call from the Bank of International Settlements (BIS) this week for central banks to begin tightening policy, Tucker said: “I certainly don’t think it should just be cast aside.
“I’m one of those that is worried about an upward drift in inflation expectations,” Tucker revealed, implying that he could join colleagues Spencer Dale and Martin Weale in voting for a 0.25 per cent rise in Bank rate.
Concerns over the fiscal crisis in Greece were raised by several senior officials, including King.
“There is sufficient concern in the market about the possibility of [a Greek] default for us to think about contingency plans and the consequences of this event,” King said.
“There are a whole range of risks to demand and output in the UK,” added fellow rate-setter David Miles. “One of the big ones at the moment is what is happening on the periphery of the Eurozone.”