Household income sees biggest fall since 1977

The squeeze on spending will add to caution about the need for an interest rate rise

UK households have seen the biggest fall in disposable income for more than 30 years, official figures have shown.

The Office for National Statistics said that in the year to the end of March real incomes - adjusted for inflation - fell 2.7%, a fall not seen since 1977.

Higher taxes, domestic bills and inflation are all eating away at consumers' spending power.

Bank of England governor Sir Mervyn King told MPs there was a "substantial squeeze on real living standards".

According to the latest ONS data for the first three months of 2011 household spending fell 0.6%, its fastest quarterly decline since the second quarter of 2009.

This took the annual fall in household income to 2.7%, a squeeze on spending that was underlined on Tuesday by further gloom on the High Street.

'Uncomfortable'

Chocolate chain Thorntons said it would close some stores and Liverpool-based department store chain TJ Hughes said it was preparing to appoint administrators.

Sir Mervyn told the Commons Treasury Committee that "inflation is clearly uncomfortably high" and contributing to "a very substantial squeeze on real living standards".

He added: "This is the way in which we, as a country, are adjusting to the consequences of the financial crisis and the macroeconomic rebalancing that is necessary to get through that process.

"And it's going to be an uncomfortable period. There's no doubt about that," Sir Mervyn said.

The consumer prices measure of inflation is at a two-and-a-half year high of 4.5%, and may go higher before falling slowly from next year.

But further evidence that consumer spending is under pressure will bolster arguments from those economists and policymakers who believe interest rates should be kept on hold.

The Bank of England has kept interest rates at a record low of 0.5% since March 2009, despite inflation being above the Bank's 2% target for most of that time.

Despite expectations earlier this year that interest rates would rise by the summer to try to curb inflation, many experts now believe the prospect of an increase has now disappeared into 2012.