Britons have a bitter year of cold, hard facts ahead

It is going to be a difficult year for the British as unemployment rises and inflation keeps climbing.

It has been raining bad news in the UK, creating a perfect economic storm.

Government data showed inflation last month rose 3.7 per cent over December 2009. On Tuesday came the shocking revelation that the economy shrank 0.5 per cent in the final quarter, reversing a third-quarter rise of 0.7 per cent and 1.1 increase in the second quarter.

The contraction was put down to the severe weather - but even if this was excluded, GDP growth would have been "flattish", according to the official statistics office.

But the most depressing news was to follow. In response to the GDP estimate, Mervyn King, the Bank of England governor, has warned that Britons face the deepest plunge in living standards since the 1920s as unemployment rises and inflation keeps climbing, possibly as high as 4 or 5 per cent in the next few months.

But the worst thing about it is it seems there is nothing the bank can do about it. Mr King said rising inflation had been caused by global increases in energy and commodity prices, and tax increases in the UK such as the VAT rise to 20 per cent at the start of the year. Raising interest rates might help to curb inflation but it could also hurt the slowing economy.

"If the MPC [Monetary Policy Committee] had raised the bank rate significantly, inflation might well have started to fall back this year but only because the recovery would have been slower, unemployment higher and average earnings rising even more slowly than now," said Mr King.

The bank "neither can, nor should try to, prevent the squeeze in living standards", he said, as official figures show take-home pay fell 12 per cent last year, a pattern expected to continue this year.

Analysts say the economic contraction has seriously damaged prospects for an economy still hobbling to recovery. It also raises the prospect of "stagflation", a period of high inflation, slow economic growth and high unemployment.

Mr King believes recovery will be choppy this year, but there are fears among analysts that the country may slip into another recession.

More and more businesses are in financial straits. Insolvencies are expected to rise by 10 per cent this year affecting some 23,500 companies, according to the insolvency specialist Begbies Traynor.

Some companies have tried increasing their prices inordinately on the back of inflation and the VAT rise, but this is likely to backfire as long-suffering consumers take stock of their finances.

John Nixon, 53, from Essex, was pretty irate when the sheepskin jacket he was looking at buying went up in price by more than 10 per cent in a week. He says he will definitely cut back on spending.

"I will certainly cut back on non-essential items, such as the sheepskin jacket, and live on as little as possible," says Mr Nixon. Considering he is a free-spending bachelor whose expenses are mainly on motorbike gear, his withdrawal from the world of consumerism would be a loss to the economy. Multiply that by hundreds of thousands of consumers and an economic disaster seems inevitable.

A survey by the economic consultancy Markit found consumers were particularly concerned about inflation, with about 83 per cent of the respondents reporting an increase in the cost of living. About 52 per cent also said they were less inclined to make large purchases this year. Shopping data for last month were the worst since 1998.

"Households are once again running just to stand still," says Tim Moore, a senior economist at Markit.

David Cameron, the prime minister, has expressed his concern over the effects of inflation on consumers. But the austerity measures will stay to tackle the yawning deficit, he told the BBC last Sunday.

So this year will be a washout for Britons. The snow may have melted but the harsh wind will still be blowing hard through the UK economy for some time to come.