Inflation in the UK is predicted to fall to its lowest level in at least 25 years as the dramatic drop in oil prices and the supermarket price war drag down the cost of living.
The report due to be released on Tuesday at 9.30am GMT by the Office for National Statistics is expected to show that inflation dropped to 0.4% in January, which is down from the 0.5% recorded in December and well below the Bank of England’s 2% target.
The Bank of England governor, Mark Carney, said: “It will likely fall further, potentially turn negative in the spring, and be close to zero for the remainder of the year.”
The plunge in oil prices and falling food prices are likely to push inflation to zero in the second and third quarters of 2015, probably dipping into negative territory for one or two months this spring.
The mixture of rising wages and falling energy and food prices will help household finances and boost the growth of real take-home pay this year to its fastest rate in a decade. This will support solid growth in consumer spending.
The Bank has revised upwards its forecasts for growth in 2016 and 2017, just like the Organisation for Economic Cooperation and Development and other forecasters.
Rob Wood, chief UK economist at Berenberg bank, believes that after two years of solid UK recovery the labour market was pointing to better wage gains around the corner.
It is hard to find a labour market indicator that has not brightened. Underemployment remains higher than unemployment, but the former has nevertheless fallen markedly from its peak.
He agreed with the Bank’s forecast that inflation would be low or zero this year despite rising wages, making “2015 the year of the consumer”.
"We have for some months been forecasting 2015 to record the strongest consumption growth in a decade. Improving pay, along with falling petrol and food prices, should combine in a powerful cocktail that puts the fizz back in the UK recovery."
The BoE’s updated forecasts this week show rate setters looking for consumers’ real disposable income to gain 3.5% this year, the highest for 10 years.
The last time headline inflation was negative in Britain was March 1960, according to the closest comparable data from the Office for National Statistics.
