E is a simple reason why retail sales are beginning to fall, and it has very little to do with the Comprehensive Spending review. A triple whammy of limited pay rises, elevated inflation and tax increases have conspired to impoverish most of the public over the past year, a development that has been barely picked up in Westminster and by the media. In those circumstances, it was always going to be the case that people would have less money to spend – hence why retail sales fell for the second month in a row in September, by 0.2 per cent.
Take pay rises. Total earnings are up just 1.7 per cent over the year; private sector workers have seen pay rises of just 1.2 per cent. Few companies can afford to be generous in this uncertain environment, characterised by a spike in input costs; fortunately, employees have been understanding and cooperative.
Yet inflation on the retail price index – the broadest measure of inflation, including mortgages – is running at 4.6 per cent per cent a year. Even the consumer price index, the official measure of inflation, is now at 3.1 per cent. It gets worse: the tax and price index, the best cost of living measure – albeit one which nobody seems to pay attention to any more – which also takes account of direct tax and national insurance increases, is running at a whopping 5.1 per cent a year, according to the Office for National Statistics.
Ian Stewart, chief economist at Deloitte, kindly agreed to crunch the numbers: he discovered that real average take-home started to fall in December 2009 and has been collapsing ever since. Over the past 12 months, the value of an average pay packet after retail price inflation and direct tax is down a crippling 3.4 per cent. Private sector workers have suffered an almost unprecedented pay cut of 3.9 per cent; public sector staff of 2.2 per cent. The last time folk were being squeezed as much by inflation and tax hikes was in 1982.
This decline in real take home pay is the real reason why many voters are feeling subdued, the primary reason why consumer confidence is falling, why the housing market is going south again and why so many people are convinced we are still in recession. Joe Public feels betrayed, for another reason: the establishment doesn’t seem to be taking seriously his main concern – the soaring cost of living.
The media, economists and the establishment largely support further quantitative easing, a move which many hard-pressed wage earners and savers feel will see a further debasement of the currency (they are not necessarily right, as it happens, though I agree it would be wrong to engage in further QE). Yet, as these figures show, there is no threat of deflation, the disease that QE is meant to cure, merely the increasing reality of a quasi-1970s-style stagflation, with weak but positive growth combined with high price rises. No wonder populist newspapers are so angry at the economic establishment; they are reflecting Middle England’s angst.
House prices have also started to fall again, while after tax and inflation, rates paid on current accounts are often negative. With VAT about to rise, retail sales are likely to remain subdued for a while, acting as a drag on aggregate demand. It won’t tip us into recession – private investment is returning, and exports remain strong – but the rebalancing of the UK economy away from excessive consumption has started in earnest.