July 4, 2008 | posted by Michael Baxter in Distribution of income |

Underlying fundamentals are strong.  That’s the reason given for why the current economic crisis will be short-lived.   That’s why the Halifax and Nationwide insist there will be no property crash.    That’s why Gordon Brown and Co think the economy is basically in good shape.  It is just the credit crunch.  Once credit is restored, everything will be fine.

But for people working hard on an average sort of income, things have been getting tougher for some time.   Unemployment might be low, but we didn’t seem to be feeling any better off.

A year ago, Ernst and Young shone a lot of light on the picture.   Back then, it found that the average family had just over 22 per cent of its gross income left over, as opposed to over 28 per cent in 2003.   The report was published before the credit crunch, and did not get the attention it deserved.

But that was then.  It’s a year on, and now our discretionary disposable income, that’s after things such as petrol, council tax, utility bills, rent/mortgage, is at its lowest level in five years.  The average household now has just £772.79 left over, as opposed to £909.84 in 2003/04.

We all know why, council tax, utility bills, and of course food and petrol, have all been soaring.

“All consumers are painfully aware of the huge hikes in petrol and utility bills but we’ve also seen some fairly hefty price increases in pension contributions and debt repayments,” said Jason Gordon, the director of retail at Ernst & Young

He added: “If we go one step further and factor in food price inflation, which official figures have placed at 8.7 per cent in the last year, it’s clear that household budgets are under enormous strain. Add in the impact of falling house prices on the consumer’s propensity to spend, and the consumer economy is undoubtedly on a knife-edge.”

Earlier this week, Bank of England MPC member Charles Bean warned that living standards are expected to fall for another year.

So that’s pretty bad.  The economy may have been booming for five years, but we have not been getting any better off.  Presumably then, the boom was funded by borrowing.

But, if we have less money left over to spend on living, as opposed to surviving, how can there be inflationary pressures?

That is why, in the longer-term, deflation is a danger.  Once oil and food price hikes have worked through the system, we could be left with a nasty shortfall in demand, leading to price falls. 

And that, in the longer-term, is surely the bigger danger.