Deflation and a rise in real incomes aren’t down to Tory policies

The sight of Labour MPs clucking at David Cameron like chickens at yesterday’s PMQs might have distracted LabourList’s observant readers from the fact that inflation has now reached its lowest ever level, at 0.5%. This is so low that it could lead to an outright drop in prices.

In an attempt not to scare the horses (let’s stick with the agricultural theme, why not?), George Osborne said yesterday: “Rising real incomes, a recovery spreading to all parts of our economy, and family budgets that can stretch that little bit further – let’s celebrate these effects of low inflation, not fear them.” Or to put it another way, rejoice! Everything is cheaper now and the cost of living crisis is over!

If that sounds like political hokum to you, it’s probably because it is. At the TUC last year, Mark Carney himself noted that UK real wages have fallen by 10%.  The “rising real income” Osborne is celebrating is more likely a result of life getting slightly cheaper rather than people getting paid a decent wage. Wage growth climbed by 1.6% in Q3 of last year, but to quote the Financial Times:

“Real wages in the UK have dropped about 8 per cent since the financial crisis began in 2007-8 — a bigger fall than in most other developed economies including those hard-hit by the crisis, such as Italy, Spain and Japan. The Office for Budget Responsibility, the official fiscal watchdog, expects real wage growth to recover slowly to about 2 per cent a year. Nonetheless, that will still leave real pay lower in 2019 than it was in 2007.”

Moreover, we really oughtn’t kid ourselves that deflation and a rise in real incomes is any reflection on Tory policies. As Geoff Tily notes on ToUChstone, “disinflation and deflation are symptoms of the contraction of spending and incomes across the world (which includes the UK) that have been underway really since the monetary and fiscal stimulus of 2008-09 was withdrawn, and (modest) fiscal stimulus replaced with contraction.”

Then there’s the sharp drop in global oil prices to consider. According to the Guardian, some oil traders reckon the prices of crude will fall to just $20 per barrel, an eye-watering drop considering the lowest oil ever got during the financial crisis was $30 per barrel.

Having said all this, we all know that if facts were the most important aspect of politics, The Order of Nigel Farage (or UKIP, as I believe they call themselves) wouldn’t be polling at 14%. The question is how Labour adapts its cost of living narrative to explain an increase in real wages. As Matthew Whittaker of the Resolution Foundation observes, the decisive factor of May 2015 may turn out to be the length of the average voter’s memory. The party had better make sure the answer is “longer than seven years” or David Cameron could find he suddenly has a generous arsenal of rebuttals to play with.