How falling inflation and rising wages could change the political debate over the economy

New figures on wages are bad for the shrinking public sector but better for the expanding private sector workforce Photo: PA

The boring bit - so long as the retail and consumer price indexes are 'positive', prices are rising.

The indexes measure the 'rate' at which prices are rising and today's figures show that that 'rate' is falling.

Put simply: inflation, the rate at which prices are going up, is slowing down.

Inflation has fallen to its lowest rate in four years Credit: PA

In a healthy, growing economy one expects price-rises broadly in line with the rate at which the whole economy is expanded. If they rise, or fall, much faster than that, you've got a problem. Economists like balance or, as they call it, 'equilibrium'.

At the moment inflation is a tad behind economic growth so the trend expectation will be for prices to rise a bit once unemployment shrinks further and 'real wages' (wage rises minus inflation) start to firm up.

By the way, these numbers, historically, are tiny. In the 1970s, inflation was in the mid-20%s.

That was due to the shock of accelerating oil prices, as much as anything, and the capacity of the then-mighty trade unions to negotiate wage rises to keep up with the soaring prices their members and their families faced on the high-street and in the bills crashing onto the doormats.

So the real significance of today's numbers is not so much the inflation data as the earnings data: I quote:

"Public sector workers saw a rise of just 0.9% in the same period, but private sector pay growth was 1.7%, meaning it has already caught up with the increase in prices".

Today's earnings data is bad news for police officers, teachers and nurses Credit: PA

Bad news for police officers, teachers, nurses and the rest of the shrinking public sector but better news for the expanding private sector work-force.

Politically it is explosive.

With petrol prices coming down, partly helped by the Government being nudged by one if its own backbenchers to take marginally less in duty, motorists and transport businesses up and own the country will feel the impact.

It has been a key part of their 'costs of living crisis'.

A slower rate of price rises for clothing and footwear will put also put a spring in the steps of 'hard-pressed families'.

I have chosen to highlight those two phrases because they are at the heart of the current political clash between Labour and the Coalition.

If the relative lid on inflation holds and more workers, public and private sector, begin to see some improvement in the purchasing power of their pay, the political 'terms of trade' will have changed, rather sharply.

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