UK real incomes are falling

This chart should have a grim resonance for most of us; it tracks the six month change in real post tax income per head. In other words, income adjusted for inflation.

Real incomes have been falling during 2008, and when that happens households can have two options. They can reduce expenditure or they can borrow more.

In the past, most households took the second option. For example, real incomes fell back in 2005, however, household borrowing increased. This year, the credit crunch has encouraged more thrift. Hence, household consumption is on the slide, and this has pushed the UK economy in recession.

This also explains why Brown, Darling and the Bank of England are so keen to get us back to our old habits of borrowing. They think the UK public will get restless without our weekly narcotic of a trip to the shopping centre.