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Last week, the Monetary Policy Committee stuck to its inflation fighting guns and left its policy rate unchanged at 5 per cent. Although widely expected, this move will still be hard to swallow for many UK businesses and homeowners. Worse still, the markets now believe that the next move by the MPC could be up and not down.

Last week, the Monetary Policy Committee stuck to its inflation fighting guns and left its policy rate unchanged at 5 per cent. Although widely expected, this move will still be hard to swallow for many UK businesses and homeowners. Worse still, the markets now believe that the next move by the MPC could be up and not down.

It would be cruel to liken the MPC to the musicians on the Titanic who reputedly played on as the passengers scrambled for the life rafts as the great ship slowly slipped into the ocean depths. And it would be cruel to liken the venerable committee to the British characters in the Carry On movie – Carry on Up the Khyber. You know the scene I mean. The one where they continue with their dinner as their fortress is ransacked by the locals and as cannon fire slowly reduces their room to rubble. It would be cruel to make these comparisons, but I just could not resist it anyway.

Every week, the news for the UK householder seems to get worse. According to Nationwide, house prices are falling at their fastest rate for nearly 17 years. This week, the Halifax announced that they had fallen by

2.4 per cent in the month of May, and are now 8 per cent lower than their August peak last year. This week’s chart shows how house prices have fallen from this pre-credit crunch pinnacle. The chances of avoiding double digit percentage house price falls this year now seem extremely remote.

But falling house prices alone do not necessarily mean that a recession is on the way. Something else is usually required. Back in the early 1990s, that something else was membership of the European exchange rate mechanism, which prevented interest rates from coming down to cushion the blow from lower housing wealth.

This time, it looks like that something else is oil. The recent GfK consumer confidence survey was grim confirmation that the combination of falling house prices and rising fuel costs are having a significant, detrimental impact on UK consumer confidence. The headline balance fell to -29, its lowest level since the last recession. The underlying details of the survey were no less depressing. Consumer perceptions’ about the general economic climate were the weakest on record, since at least 1986.

But the key to future spending patterns is the way consumers feel about their personal financial circumstances. The difference between a slowdown and a recession is that in the former people may feel less confident about the economy, but still have confidence in their own personal finances. With the latter consumers have no confidence in either the economy or in their own personal finances.

This is why the sharp fall in the part of the survey that asks about how consumers feel about their personal finances is particularly worrying.

The balance of respondents expecting their personal financial situation to improve over the next year has crossed the zero line for the first time since the mid-1990s. That is, more people think that their personal finances will deteriorate over the next 12 months rather than improve. Consumers in the UK are also saying that now is the worse time to make a major purchase, again since the survey began in 1986.

But intriguingly they are not saying that is it a good time to save. The balance saying that they expect to save more has halved over the past six months, indicating that they are feeling the squeeze on their disposable income from higher fuel and other bills.

As the perhaps inappropriately named Rachael Joy, member of the consumer confidence team for GfK NOP, said in its recent press release: “Consumers’ confidence in the economy in the next year, plus a reluctance to make major purchases, reflect the popular expectation of a recession – both these measures are the lowest on record.”

The MPC is, of course, not unaware of these facts. They are not in fact behaving like Sid James, blithely making rate decisions unable to hear the housing market crumbling outside the fortified walls of the Bank of England. But the analogy with the musicians on the Titanic is more fitting I think. The musicians were obviously aware of the disaster that was unfolding around them. It is just that they were powerless to do anything about it.

Andrew Clare is a professor of asset management for Cass Business School and a director of Fathom Consulting