Household spending power suffered its biggest drop since 1977 during the first three months of 2011, as the Bank of England warned that, because of high inflation, people face several more “uncomfortable” years. According to the Office for National Statistics (ONS), household disposable income in the first three months of this year was 2.7% lower than the same period in 2010, which it said that was the biggest annual fall in spending power for 34 years. The new figures showed that real household disposable income fell 0.8% quarter-on-quarter and by 2.7% over the past 12 months, one of the biggest cuts since the Second World War. Despite the downturn and subsequent recession, households felt an average increase in their disposable income in 2008 and 2009, due to a fall in mortgage costs and an increase in benefits payments. However, that has now been offset by prices rising faster than incomes, further squeezing consumer spending. The governor of the Bank of England Sir Mervyn King told MPs that he was “definitely concerned by the squeeze on real living standards” and that households faced “an uncomfortable period ahead”. He told the Commons Treasury committee that the Bank was unlikely to be able to relieve the inflationary pressure on households quickly. “I don’t think it is easy to do much about that,” he said. “It is going to be an uncomfortable period, there is no doubt about that. Inflation is currently running at 4.5% and the Bank of England said that it would be “two or three years” before inflation falls back to its target rate of 2% The Bank Rate is 0.5%, but the Bank is not expected to increase borrowing costs this year, for fear of smothering the economy.

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