UK real incomes to rise at last in 2014, says Bank of England official

Falling inflation and rising business profits predicted to end four-year squeeze on household budgets

Ben Broadbent of the Bank of England said lower inflation would help reverse a 4% fall in real wages since mid-2009. Photograph: Bank of England

British households can look forward to rising real incomes in 2014 after four years in which high inflation has outstripped wage increases, a Bank of England policymaker said.

Ben Broadbent, a member of the Bank's monetary policy committee, said lower inflation and a recovery in companies' profit margins would finally ease the long squeeze on household budgets.

Inflation fell back to the Bank's 2% target for the first time in four years in December, according to official figures published on Tuesday.

Broadbent told an audience at the London School of Economics on Friday there were "signs these headwinds are beginning to abate", after a 4% fall in real wages since mid-2009.

"It seems to me highly unlikely we'll see anything like the relative price headwinds of the past four years. If anything, given the longer-term trends in the UK's terms of trade, a move back in the opposite direction is a more likely prospect."

He also predicted a rise in business investment, playing down concerns that the recent UK recovery has been too focused on consumer spending with companies hoarding cash.

"Business investment tends to lag, not lead, the cycle in output. History, and a variety of indicators, suggests it is likely to accelerate through this year. Indeed, allowing for measurement error, it may already have started to do so."

He said the latest indicators from business surveys were more positive than the latest official data, which he noted "are subject to revision".

"Of course there's a risk the recovery could falter. But if it does, it will probably be because of more fundamental problems – a failure of productivity to respond to stronger demand, for example, or continuing stagnation in the euro area – not any imbalance in expenditure or income per se."

Broadbent said a sustained recovery depended on an increase in productivity in Britain.

"It will be impossible to get any sort of sustained growth, balanced or not, without an acceleration in productivity," he said.