Experts predict fall in inflation

9:10am Tuesday 18th November 2008

Inflation figures for October are set to show the first month-on-month fall in the cost of living for more than a year, thanks largely to cheaper petrol prices.

The Consumer Prices Index (CPI) - the official measure of the cost of living - reached a record high of 5.2% in September after the latest round of rising energy costs during the summer.

But most economists expect it to fall back to around 4.8%, mainly due to the easing pressure on motorists at the petrol pump.

After a year of soaring food, oil and energy costs, October is likely to be the first month of slackening inflation rates since August last year.

Other base effects set to reduce inflation will be the contrast with the big jump in mortgage arrangement fees seen in October last year in the wake of the credit crunch, according to Investec economist David Page.

After wrestling with rising inflation for a year, the prospect of deflation is now the major threat to rate-setters as prices fall in a looming recession.

More interest rate cuts are set to come on top of the bold 1.5% slash to 3% two weeks ago as the Bank of England's latest forecasts show it undershooting its 2% inflation target by more than 1% if rates are held at current levels.

Bank Governor Mervyn King last week said it was "very likely" that the wider Retail Prices Index measure will turn negative next year as mortgage payments fall.

Deflation is a serious threat because consumers and businesses can defer spending in expectation of falling prices, hitting the economy.

IHS Global Insight economist Howard Archer said he expects CPI to stand at just 0.5% next year.