Millions of families face a painful squeeze in the cost of living, with figures showing a sharp fall in wage rises against a background of soaring prices.
Workers in the private sector saw their pay increase by an average of only 0.8 per cent in the past year, while inflation is four times higher at 3.2 per cent.
Details of the cap on wages were revealed as the Bank of England warned that inflation is expected to stay above the official target of 2 per cent through to the end of 2011.
At the same time, sharp rises are in the pipeline on petrol and food following the doubling of the commodity price of wheat, barley and some other grain in recent weeks.
Bank Governor Mervyn King issued the alert as he said Britain is facing a ‘choppy recovery’ and cut his prediction of how quickly the economy will grow next year.
In yesterday’s quarterly inflation report, the Bank slashed its growth forecast for 2011 by just under a percentage point to 2.5 per cent.
But inflation would remain above the Government’s 2 per cent target for this year and next before falling back to 1.4 per cent in two years, it said.
Tumbling consumer confidence and the Government’s savage budget cuts will act as a brake on the economy as it struggles to emerge from recession, Mr King warned.
The crippled banking system and the mounting signs of stress in the global economy could derail Britain’s tentative recovery from the deepest downturn since the Second World War, he said.
Mr King warned: ‘Business and consumer sentiment have shown signs of softening, measures of financial fragility remain elevated and there is great uncertainty about the outlook for both the United States and our most important trading partner, the euro area.’
The squeeze on living standards – the harshest since the 1970s – will be intensified by the decision to push up VAT to 20 per cent from January 4. The salary figures were published by the Office of National Statistics (ONS) and confirm a pay apartheid between the private and public sectors.
Compared with the private sector’s 0.8 per cent average rise, increases in the public sector were more than triple that at 2.9 per cent.
Average public sector pay is also higher than in other walks of life, with a weekly figure of £470 against £451 in private firms – an annual gap of almost £1,000.
While the Government has announced a public-sector pay freeze for millions of workers designed to cut national debt, the unions have threatened a fight which could bring massive disruption in the autumn and beyond.
Retail industry experts have warned that the price of bread could rise by as much as 15p a loaf in the coming months. Higher wheat prices will also push up the cost of pasta, pies and processed food while a pint in the pub could cost more than £4. Prices will also be driven up across the high street by reports that petrol could reach a record high of more than £1.25 a litre in the new year.
Separately, power companies have been withdrawing cheap gas and electricity tariffs with some hinting at a need for rises.
Howard Archer, chief economist at IHS Global Insight, predicted that consumers will feel the pinch from wage restraint and high inflation.
‘With wage growth muted and a major fiscal squeeze increasingly kicking in, it is hard to see consumer spending being anything else than muted for an extended period,’ he said.
Details on pay were published alongside the latest unemployment figures which delivered the good news that the total was down 49,000 to 2.46million.
At the same time the number in employment rose by a 21-year high of 184,000 compared with a year ago.
However the vast majority of this increase – 115,000 – was in those taking low-paid part-time jobs as they fight to keep their heads above water.
The figure was also buoyed by a rise in the number of pensioners taking part-time work to supplement meagre incomes.
The jobless figures also confirmed that older workers are not benefiting from the apparent improvement. The number of over-50s in full-time work came down by 11,000.
Mervyn King’s comments reopened the debate over whether the scale and extent of the Government’s programme of cuts might plunge Britain back into recession.
Energy Secretary Chris Huhne insisted the recovery was ‘soundly based’, and dismissed fears of a ‘ double dip’ recession. He said the Government’s efforts to tackle the budget deficit were helping prevent a hike in interest rates which would damage the economy.
‘We mustn’t extend these maritime images too much. The Governor of the Bank of England was talking about “choppy recovery” and “ working against the head winds” and heaven knows what else.
‘The reality is that it is very unusual that there is a double dip recession in economic history and there are a lot of forces that are working to sustain the recovery. I just don’t think that there is going to be a threat to the recovery.’
But former chancellor Alistair Darling accused ministers of a ‘reckless style of austerity economics’ which threatened to derail the recovery. He added: ‘It will hit confidence and it will hit jobs.’
Give pay-offs back, Labour rivals told
Labour’s leadership contenders have been challenged to accept their ‘ responsibility’ for the economic crisis – and hand back their £20,000 ministerial pay-offs.
Conservative Party chairman Sayeeda Warsi said ministers should atone for ‘running up colossal debts on the nation’s credit card’.
Labour ministers pocketed an astonishing £1million in severance pay after being booted out at the election – even though most have kept their jobs as MPs on £64,766 a year.
Former Cabinet ministers, including the Labour leadership candidates David Miliband, Ed Miliband, Ed Balls and Andy Burnham, were each entitled to handouts worth £19,938.
The former Treasury chief secretary Liam Byrne, who left an infamous note for incoming ministers saying there was ‘no money left’ walked away with a similar sum.
The pay-offs were described as ‘rewards for failure’ and Baroness Warsi said ministers had a moral responsibility to hand the money back.
She said Labour was ‘in denial’ about the impact of its spending splurge. ‘At a time when people are being asked to tighten their belts, it is unacceptable that those responsible for this mess walk away with up to £20,000 each.’
Lady Warsi, a lawyer, wrote to the four former Cabinet ministers now challenging for the Labour leadership asking them to return the money.
Labour dismissed the call for the leadership contenders to give up their severance payments.
A spokesman said: ‘This is a pathetic attempt by the coalition to create a smokescreen around today’s serious economic issues.’
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