Inflation and Tax Rises Crush Britain's Middle Class, Real Earnings 25% Drop!
Economics / UK Economy Mar 04, 2011 - 08:00 PM GMTUK annual earnings grew at an annualised rate of 1.1% (December 2010), this compares against the official UK inflation rate of CPI 4% and the more recognised RPI at 5.1%, with the real UK inflation rate as experienced by most of the people of Britain running at 6.6%.
Clearly Britain's workers are being squeezed hard by a multitude of government policies that manifest in negative real earnings growth as the government seeks to use the stealth tax of inflation to erode the value of the ever expanding public debt mountain, where at least half of the annual budget deficit is as a direct consequence of the fraudulent actions of the banking sector, the price for which is continues to be paid for by the workers of Britain.
The UK Average earnings graph illustrates the real terms loss of purchasing power of earnings against both of the official inflation measures (CPI, RPI) which may surprise many to learn is not a recent phenomena but that the trend of negative real earnings growth has been in force since mid 2008 and is now approaching 3 years of punishment for workers for the crimes of bankster's that makes a mockery of the propaganda being pumped out by vested interests in the banking sector and coalition government that the tax payer is sitting on profits on banking sector capital injections.
The in-depth analysis and forecast for UK inflation for 2011 (17 Jan 2011 - UK Inflation Forecast 2011, Imminent Spike to Above CPI 4%, RPI 6% ) concluded in UK inflation spiking to a high of 4.2% early 2011, and thereafter trend lower towards 3% by the end of 2011 remaining above the Bank of England's 3% upper limit for the whole of 2011. However, crude oil going super nova as a consequence of the breakout of freedom in the middle east, that could result in the oil price spiking as high as $200 would see UK CPI break above 7%, resulting in a far worse blood bath for the workers of Britain than the on going bankster bailout feeding frenzy.
Middle Classes To Lose as Much as 25% of their real earnings.
Whilst the poor can rely on benefits and the rich can rely on capital growth to profit from asset markets being inflated by the central banks far beyond the official inflation indices. However that leaves 70% of the British population that class themselves as being middle class to feel the full force of the Inflation and economic austerity mega-trend.
Whilst many students (middle class wannabe's) have woken up to a near tripling of the debt burden they will be placed under, however, the situation for Britains vast middle class is set to get far worse than that which even the dire inflation outlook implies because on top of the inflation stealth theft of wealth and wage purchasing power there are a series of tax rises and benefit cuts due to hit the middle class workers of Britain and especially those with children as taxes rise such as national insurance, and tax allowances are cut, and benefits (tax reimbursements) such as tax credits are reduced and in many cases totally withdrawn which means middle class workers could be hit by an additional loss of earnings purchasing power of 5% per annum on top of the real inflation theft of at least 3% per annum, none of which features in any Bank of England or Government economic propaganda report.
Whilst trying hard to refrain from using expletives here, but the middle class of Britain is truly FQ&*ED! Middle class families will typically be poorer by between 15% and 25% by April 2013, as from Jan 2013 many benefits will be cut such as the universal tax free child benefit payments being ripped away that alone amount to a loss of 7% of disposable income for a £45k wage earner with 3 children, that is destined to break the backs of many a middle class family fighting hard to stay above water in the wake of soaring prices.
Tip - The way for workers to avoid loss of child benefit is to ensure each parents taxable earnings are below £42,375, one way to achieve this is to make a payment into a personal pension fund that would bring taxable earnings to below £42,375. There are a number of other mechanisms such as salary sacrifice and using cash ISA's to have savings interest excluded from taxable earnings.
To illustrate the severity of the situation, the loss of 15% to 25% of real earnings needs to be compared against the accumulative loss of purchasing power of approx 4% under Labours disastrous last 2 years in power, as Labour effectively sought to bankrupt the country so as to maximise seats won at the May 2010 General Election and deliver the Conservatives a scorched earth economy as I began warning of since at least mid 2009 (31 May 2009 - Labour Governments Bankrupt Scorched Earth UK Economy for the Conservative Government ).
There will be a great deal of pain, for worse than anything experienced during that of at least the past 30. The workers of Britain need to prepare themselves for this pain by taking action now to both protect their wealth and pay down debts as this trend given the governments persistently high budget deficit that continues to accumulate a ever higher debt mountain is likely to last for the whole of this decade.
The net result of the inflation and economic austerity mega-trend will be that a decade from now half of the middle class will have disappeared and have been forced to join the working class. It is not too incredulous to suggest that where the middle classes of Egypt is today is where the middle class of Britain will be in 10 years time, the politic consequences of which will be for the re-birth of socialism which will mean far greater long-term economic pain for everyone!
Inflationary Wage Price Spiral
The risk that the Bank of England and Government is running is that people feeling real pain of contracting real earnings see through the Smoke and Mirror statistics of nominal growth and realise that persistent high INFLATION is pure and simple THEFT of their wealth and start demanding far higher pay rises than the official inflation rate, which I am sure that the implementation of the austerity cuts will act as a triggering mechanism for, this will make all workers far more militant and therefore many more strikes will breakout during 2011 and into 2012-2013 as the middle class of Britain revolt against severe contraction in earnings and erosion of wealth.
The effect of many more striking workers will be INFLATIONARY, because even marginally less goods and services produced act to force up prices, a ratcheting up effect, the higher inflation goes the less control the government or Bank of England will have over inflation as it will become LESS responsive to future interest rate hikes because people start to lose faith in the currency, as they don't want to hold onto something that is fast losing its value, they want to get rid of it, SPEND it on goods and services that they will find increasingly difficult to purchase with diminishing real wages.
Governments are always playing a dangerous game with inflation because governments NEED inflation to DEVALUE the DEBT, but populations REACT to persistently real high inflation by increasingly demanding higher pay far beyond that of discredited official inflation indices i.e. to make up for the shortfall in tax rises and benefit cuts that is expected to range upto 25% per annum loss of purchasing power by April 2013, and thus become highly reluctant to hold onto fiat currency as they seek to consume goods and services as soon as possible, and savers seek out hard assets or alternative currencies.
Another point to consider is that the spark for high inflation has already been lit by the budget busting mega black hole across the Atlantic that is burning the worlds reserve currency as though there is no tomorrow, in which respect there is no way that the British Pound will be able to escape its event horizon as both the dollar and sterling are heading for the same final destination regardless of volatility between the currency pairs that gives the illusion of a rising pound.
The implications for UK interest rates will be covered in my next in depth analysis and concluding forecast to be imminently completed, ensure you are subscribed to my always free newsletter to get this analysis and forecast in your email in box.
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By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 600 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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