UK economy in three important numbers

Here are three numbers for you: in the year to November, the cost of living as measured by the consumer price index rose by 2.7%; during the three months to October 2012 average earnings excluding bonuses were 1.7% up on the same period in 2011; house prices in the UK in October were 1.5% higher than a year earlier.

These three numbers tell you much about the state of the UK economy. How, for instance, it can be suffering from inflationary and deflationary pressures at the same time. How, unlike in the past, rising prices are not inflating away household mortgage debt. Why the outlook for growth in 2013 remains poor.

It is clear what the economy needs to lift it out of its torpor: a period where earnings and house prices rise faster than consumer prices. In those circumstances, consumer spending power increases and the real value of property debt falls. The increase in house prices makes people feel better off; the increase in real incomes means they are truly better off. Consumers start to spend more, with a knock-on effect to business investment.

What the UK has is the reverse. Real incomes are falling not rising, and house prices are not going up in line with inflation. These trends look well entrenched. Union bargaining power is weak, so there is no immediate prospect of a pick-up in earnings growth to the 4%-plus average in the three years before the crash. Property is still overvalued and will be affordable only after several more years of below-inflation increases in house prices.

There is some evidence that the Bank of England's funding for lending scheme is increasing the flow of mortgage funding, and that should put a floor under house prices even if – central London apart – there is no immediate prospect of a property price boom. The gap between CPI inflation and earnings is likely to widen over the coming months, with dearer food and energy bills intensifying the purchasing power squeeze. Eventually, this will mean weaker cost of living pressures – but for now Britain has the wrong sort of inflation.