Pig ignorance abounds in our cost of living crisis First, prices. In the early stages of the post-Lehman bust, collapsing demand caused inflationary pressures to all but vanish. Unfortunately, it didn't take long for them to resurface. Deflation was never a serious option for Britain, or indeed threat. It's just not in our DNA. The primary reason for higher prices was the sudden and very dramatic depreciation in sterling that took place in the early stages of the banking crisis. Overnight, Britain became around a fifth worse off relative to the rest of the world, with very significant inflationary consequences. At the same time, buoyant demand from emerging markets caused commodity prices, including oil, to spike upwards. In combination, these two phenomena meant that the amount of foreign goods and services UK households could purchase using the proceeds from domestically-produced output fell substantially. At the same time, taxes went up. Higher VAT meant that a greater proportion of available output went to the Government than to households. Other aspects of Britain's deficit-reduction programme also affected prices - for instance, reduced subsidies for rail caused train prices to rise. As Spencer Dale, chief economist at the Bank of England, puts it: "The pie has got smaller, and with it so must the slice given to households." This basic, underlying truth is what explains most of the rather higher level of inflation, relative to others, that Britain has seen since the onset of the crisis. The rest is more likely explained by "quantitative easing" than on exploitative behaviour by business; even the Bank of England admits to some inflationary impact from QE. The process may not have been entirely conscious but, in effect, the inflation target was sacrificed to the perceived greater good of support for demand and asset prices. The trade-off was an uncomfortable one for the Bank of England, but the alternative - mass unemployment and a eurozone periphery style collapse in internal demand - wouldn't have looked very clever either. In any case, it is only very recently that the Bank of England has woken up to the damage that this policy of benign neglect towards the pound may be doing to the cost of living. Second, wages. Depressed incomes are just the other side of the same, reduced circumstance coin. Output is still some distance short of its pre-crisis peak, yet private sector employment during that time has been growing strongly. The upshot is that private sector productivity could be as much as 8pc below its pre-crisis level. It's a brutal truth but if, in aggregate, people are producing less per head, they are also likely to be paid less. The longevity of this squeeze on living standards is unfortunate, to put it mildly, but again it is probably preferable to the alternative suffered by deficit economies in the eurozone, where the adjustment has been felt as much through punishing levels of unemployment as falling real wages. There are few forms of inequality worse than being on the dole. These three phenomena - disappointing output, declining productivity and stubbornly high inflation - are linked to a third failing in the UK economy: Britain's persistently large current account deficit. It beggars belief that five years after such an extreme devaluation Britain should still be importing so much more than it is exporting. Kevin Daley, chief UK economist at Goldman Sachs, thinks that the common explanation for all four of these issues is a broken banking system, which has hindered the reallocation of resources across sectors that you would normally see in a recession. There is obviously something in this argument. Low interest rates and loan forbearance has supported "zombie" companies and households who would otherwise have gone to the wall. This may have prevented the reallocation of capital to newer, more competitive, traded goods and services industries, and thereby hindered normal growth in productivity and wages. As Mr Daley suggests, it is now perfectly plausible that with a fast turning credit cycle - helped by Funding for Lending and the promise by Mark Carney, Governor of the Bank of England, of a more enlightened liquidity regime - this unhappy combination of weak productivity, persistent imbalances and high inflation will be replaced by faster growth, stronger productivity, reduced imbalances and lower inflation. If so, then we will eventually see a return to real wage growth, too. Regrettably, this sunnier disposition is still far from certain. An ultimately doomed approach to economic renewal in the eurozone, still Britain's biggest export market by far, scarcely helps matters. Euroland has what is essentially the opposite problem to that of the UK. Deficit economies are being frogmarched back into current account surplus by grinding down on internal demand through cuts in nominal wages and crushing levels of unemployment. As a result, the eurozone has moved from what was previously a balanced economy overall, with the surpluses of the core offset by the deficits of the periphery, into the world's biggest surplus economy. For Britain, this is close to disastrous, for though there are now some signs of recovery in the eurozone, they are very unlikely to be sufficient to help much with Britain's own rebalancing challenge. The UK is supporting unearned demand by loading up on credit again, the very reverse of what's required. It is small wonder that UK business is still so reluctant to invest; a lot of faith is required to believe in the long-term sustainability of the British recovery. Given these awesome macro-economic constraints, to think the cause of higher living standards might be furthered by populist, anti-big business table thumping is not just crassly unaware, it is the economics of the lunatic asylum. If the UK still has its very own unique selling proposition, it remains the openness of its economy, which is unmatched by any other major national jurisdiction. This is being casually put at risk by a Little Britain attitude that victimises corporations for making legitimate use of the tax code, denies easy visa access to rich Chinese tourists and investors, and arbitrarily threatens to slap "windfall profit" taxes and price controls on whoever the latest whipping boy happens to be. The idea of nationalisation is only a logical extension of such thinking. This is no way to run a railway, let along address Britain's pressing cost of living crisis.