Reasons to be cheerful (part 1)

The squeeze will ease in 2012.

I've been drawing up a list of reasons to be cheerful in this last week before Christmas and that is one of the better ones.

As usual, all bets are off if the euro blows up, but if the Europeans can manage to hold on to their single currency, the average UK household probably won't get to the end of the year poorer, in real terms, than they were at the start.

In fact, there's a good chance their real incomes will have edged up.

That may not sound like much, but it would be better than 2011; and 2010.

Think about it: there isn't going to be another VAT rise and I don't expect to see another big rise in the price of petrol. In fact, I think the OBR is underestimating the possibility that oil prices will fall sharply in 2012 and 2013, but that's a reason to be cheerful for another day; I don't want to run out.

With VAT and the Arab Spring falling out of the figures, 2012 is the year when the headline rate of inflation should come tumbling down. The upshot is that incomes, especially for working households, ought to start going up.

As Michael Taylor, of Lombard Street Research points out in a recent note, it was the consumer who disappointed the economic forecasters in 2011. This time last year, independent forecasters expected private UK consumption to go up by 1.1% over the following 12 months. Instead it fell, by roughly the same amount.

Part of the blame for that might lie with the chancellor, but most in the City would put it down to inflation, which also came as a rude shock to the forecasters, not to mention the Bank of England and commentators like me.

At the end of 2010, the consensus was that the target measure of inflation would be 2.7% in the last three months of 2011. Instead, it was nearly two percentage points higher. Households couldn't buy more stuff, because they were finding it hard enough to buy what they did before.

With a fair wind from across the Channel, that should change in 2012. Though don't get too excited: we're not talking about a big rise, and we're probably not talking about the next six months.

Michael Taylor now expects consumer spending to rise by 0.1% in 2012. The consensus is for it to grow by all of 0.4%, but there's going to be a big difference between the first and second half of the year.

We'll probably continue to feel poorer until the summer, because it is likely to take that long for inflation finally to fall below the rate at which cash incomes are going up.

On the World at One today, a deputy governor of the Bank of England, Charlie Bean, put a date on it. "Around the time of the Olympics", he said, the squeeze would start to ease and "people might start feeling better about things".

It's not much, but it's a start.

I'll have another reason to be cheerful tomorrow.