After the longest sustained decline in living standards since the Industrial Revolution, average wages are finally rising faster than prices – no thanks to Tory policies

The headline rate of inflation across the UK has hit zero for the first time in generations. On the Bank of England’s historical figures, the UK hasn’t experienced zero inflation since 1934.

Predictably, the news was greeted with enthusiasm by George Osborne, taking to Twitter to declare that “hard-working families” will be feeling the benefit. It’s true that temporarily low prices mean that people’s money goes further. But there’s little here that Osborne can take the credit for.

Prices are low because the cost of oil slumped over the last half of 2014, on the back of a decision by Saudi Arabia to refuse to up its own production. OPEC followed suite, and the price per barrel duly fell, causing economic chaos for oil-producing nations like Russia, hammering high-cost producers like US shale, and causing the (equally predictable) griping from North Sea producers about even the small amount of tax they are expected to pay on their super-profits.

For the rest of us, the halving of the price per barrel of crude between last summer and New Year has fed directly into falling prices for transport, with the cost of petrol down 16% since this time last year. Falling costs for transport have meant, in turn, falling costs for all those goods that rely on transportation – which is almost all of them. Food prices, having spiked over 2011, have been falling since the summer.

Put all this together and it means, after the longest sustained decline in living standards since the Industrial Revolution, average wages are finally rising faster than prices. Despite Osborne’s claims in last week’s budget, the average worker is still worse off now than in 2010. But the last few months will have seen an end to the six-year squeeze on real earnings for many.

That’s the end of the good news. The bad is what happens if – and it is a big if – prices continue to fall. Whatever George Osborne and others may say now, falling prices, known as “deflation”, are uniquely harmful for and economy like the UK’s.

This is because whilst consumers benefit initially from falling costs, all those selling us goods and services face falling prices for their output. Firms, expecting lower prices for what they sell in the future, begin to try and cut their costs – reigning in on investment, which has been falling across the UK for the last six months and, perhaps worse, seeking to squeeze on wages. Falling prices can turn into falling wages.

Officially, this is not supposed to happen. The Bank of England is forecasting a 3.5% increase in real wages this year, with deflation ended by the summer as oil prices pick up. But this seems somewhat implausible when half of employers surveyed say they are going to increase pay for their staff this year. “Core” inflation, stripping out volatile prices like food and energy, is now at its lowest level for a decade.

And if money wages don’t increase, the final, deadliest part of deflation can kick in. As the prices of goods and services fall, debts stay the same. The relative price of debt rises and rises, increasing the real burden. The UK is close to being the most heavily indebted major economy on the planet – not because of its government, but because of its private sector. And if households and firms have to pay more and more of their incomes towards meeting debt repayments, they won’t be spending in the rest of the economy. The whole system can be slowly strangled by this “debt deflation”, just as Japan has experienced for the last decade – or as Greece is, more severely, going through now.

The route out of this is simple, but unlikely to be touched by this government. Force money wages up. Let’s see some of recent economic growth in the hands of people who generate it: drop the 1% pay freeze for the public sector, and whack up the minimum wage to a living wage level. Or else start to contemplate the bleak, but growing, prospect of our a “lost decade” of our own.