The Bank of England has said consumers face the biggest squeeze in their household finances since the 1920s. What does this mean?

Since 2007 the toxic combination of rising household bills, persistent inflation, and minimal pay rises has reduced levels of disposable income and standards of living.

The Sale signs on the high street show that retailers are getting the message. However, AlixPartners director Dan Murphy points out that there are other important dynamics to consider.

“Our recent European Consumer survey indicates that 76% of people are very nervous about their levels of disposable income,” says Murphy. “Household costs such as energy, fuel, and public transport, are rising above inflation, and consumers are tightening their belts,” he adds.

With mortgage equity release consigned to history, consumers have been raiding savings accounts - to the tune of £60bn last year. Murphy’s concern is that this is not a bottomless pit. “If interest rates and mortgage payments start moving up, we could see a really tough squeeze on household finances that would inevitably put further pressure on retail spending,” he says.

He is also concerned that many households still enjoying the extra spending power from reduced mortgage payments are simply not financially prepared for any rise in interest rates. “Too many households have their heads in the sand and could be in for a serious shock,” he warns.

His view is that retailers are still hoping for a speedy recovery but should be more realistic about future spending patterns, particularly in the discretionary or big-ticket sectors. “It’s a responsibility of retailers to acknowledge what is happening and position themselves accordingly - they need to be more realistic about these macro economic trends,” he concludes.