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Brits feel big money squeeze

THE BRITISH ARE adjusting to a new, expensive era. They feel it when filling up their cars, or doing the weekly shop. Mortgage bills are soaring, while wage rises are nowhere near as forthcoming. This is the big squeeze, and we shall feel it for a long time to come.

So much was clear in the letters exchanged recently between Mervyn King, head of the Bank of England, and the chancellor, Alistair Darling.

Mr. King has to write a memo every time inflation goes more than a percentage point wide of the set target of 2 percent, or remains astray for three months. Only one has been sent in the 11 years of Bank independence; but yesterday, as inflation hit its highest level since Norman Lamont was at No 11, both correspondents agreed there would be further letters to come.

Already at 3.3 percent, inflation could easily top 4 percent by the end of the year, predicted Mr. King. He thought oil and food prices could keep rising over the next few months and noted that this was a global phenomenon.

He is absolutely right: the cost of living is rising sharply in both rich countries and poor, for America and Asia.

The Bank of England would normally have jacked up rates to quell inflationary pressure, but it is rightly reluctant to do so as the economy slows down.

On almost any indicator, from activity in the housing market to surveys of manufacturing sentiment, the economy appears to be sinking deep enough, fast enough to justify rates heading south.

For years the typical homeowner has enjoyed a combination of easy debt, rising house prices and record-low inflation: all three have now vanished, and all three are unlikely to reappear any time soon. The big squeeze is set to be a long one.

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