The picture painted by the latest inflation data is almost unbelievable. We now have by far and away the highest growth in Europe and the lowest rate of inflation.

The figures have confounded the analysts, none of whom came even close to forecasting the latest data. Indeed, even the Central Statistics Office admits to being surprised by some of the figures it has gathered.

Nevertheless, there can be little doubt but that the data are correct. The figures and weightings are compiled from the 1995 Household Budget Survey and are updated annually.

However, there is one significant problem. The inflation data do not translate into a cost of living index - they simply measure the increase in consumer prices.

This explains why many people feel their pay packets are not stretching as far as they used to, despite record-breaking low inflation. The cost of living has probably increased by far more than the simple Consumer Price Index (CPI) figures would suggest.

A true cost of living index would include house prices, the price of a car, levels of taxation and of social security. The problem is that no such index exists. The British are working on one but it is still at the developmental stage, while the American statistics agency found itself in hot water last year when the shortcoming in its own index came to light.

There can be little doubt that such an index could prove useful for wage negotiations between the social partners. The wage rises agreed under Partnership 2000 were reached on the basis that inflation was running at around 2 per cent. Most taxpayers would have assumed that inflation meant cost of living, but if that figure is significantly higher, many could feel cheated.

Compiling such an index would undoubtedly prove both costly and time-consuming. As one source pointed out this week, the problem will be persuading the Department of Finance to pay for such a development. Nevertheless, it is something for which many taxpayers may well feel there is a need.

For the moment we must work with the figures we have. And the low level of increases in consumer prices revealed so far this year have put a question mark over Minister for Finance, Mr McCreevy's consistent calls for pay and tax cut restraint. While part of this may simply be rhetoric, designed to dampen expectations ahead of the Budget in December, he must be fighting an increasingly hard battle around the Cabinet table.

There are already considerable pressures from the unions for substantial tax cuts and even some further pay rises. An increase of 1 per cent in the Consumer Price Index in the year to August does not lend credence to Mr McCreevy's warnings of inflationary dangers.

Mr McCreevy has suggested that the Budget should act as a restraining influence on domestic demand, so as to counteract any inflationary pressures. A cynic may point out that there are precious few inflationary signs emerging. But that is not the full picture. As one economist pointed out yesterday, strong demand is not posing a problem and sustaining competitiveness and a strong exchange rate remain the key issues.

Competitive pressures appear to be holding back retail prices. Clothing and footwear prices have fallen by a staggering 10 per cent over the past year. Some of this may be accounted for by competition among the new retailers from Britain and some from competitive pressures in the world economy, where sourcing may be becoming cheaper and easier.

As a result, the rate of inflation is low and it is now beginning to look as if the Minister will find it increasingly difficult to find arguments to avoid the £500 million tax giveaway which SIPTU among others is already demanding. Last week's Exchequer figures pointing to a possible balance in the Government's finances can only have added further fuel to the fire.