At 2.7 per cent, inflation is bang in line with its average rate over the last 10 years. The reason why real wages - and real incomes for savers! - have fallen isn't that prices have behaved unusually. It's that the legacy of the recession - mass unemployment and low interest rates - is depressing incomes. Ed Miliband says we have a cost of living crisis, but it would be more accurate to say we have a real incomes crisis.
However, we do have - and will have - a problem with prices. But it's a problem of relative prices, more than the absolute price level.
To see it, look at the long-term trends in the CPI. In the last 15 years, overall prices have risen by 38.1 per cent - 2.2 per cent a year. Within this, prices of services have risen 70.9 per cent, rents have risen 48.9 per cent and the cost of energy has more than doubled.
But goods prices have fallen by over 15 per cent.
And this understates the case. Fifteen years ago, you couldn't have bought a smartphone, e-reader or sat nav at any price. For some goods, then, we’ve had an infinite degree of deflation. For virtually nothing, you can now get yourself a library that would have been beyond the dreams of Edward Casaubon.
Whilst some people are talking of a cost of living crisis, others are talking of an era of superabundance. They both have a partial point.
What's going on here is a process first described in the 1960s by William Baumol. He noted that productivity growth and technical progress were stronger and more prevalent in the production of goods than in services; Socrates would immediately recognise modern-day teaching processes, but be astounded by how our clothes are made. Because of this, the cost of services rose over time, relative to goods.
This has three important implications.
First, it means it's easy to over-estimate increases in inflation. We buy petrol regularly, but gadgets only infrequently, so the availability heuristic leads us to see more inflation than there is. Mr Miliband’s talk of a cost of living crisis might be indifferent economics, but it's good psychology.
Secondly, this poses a long-term threat to the public finances. Because public spending is skewed towards services - such as healthcare and education - the relative price of government tends to rise over time. This problem might be exacerbated by public sector inefficiency, but it is not caused by it.
Thirdly, there's a lot of idiosyncratic variation in the sort of incomes we'll need in retirement. If you'll spend your later years reading cheapish books on your Kindle, visiting social media sites and buying the occasional gadget, you might be able to get by on quite little. You'll benefit from the era of abundance. If on the other hand, you'll want private healthcare, or to help your grandchildren through university, or want to eat out regularly, or want to buy a holiday home, you face the danger of quite big price rises between now and your retirement even if the overall inflation rate is quite low.
This means that whilst some of us might need to save more for retirement, others don't; it's difficult to give general advice.
If we can cultivate the tastes that benefit from changing relative prices, and avoid those that suffer, we'll enjoy a more comfortable retirement. We shouldn't just plan our finances, but our spending habits too.
