... but inf lation ‘will fall below 2% by 2024’

INFLATION has peaked and will be back below its 2 per cent target by 2024, the Budget watchdog predicted yesterday.

The rise in the cost of living – currently at a 41-year record of 11.1 per cent – will stay high for the first half of next year, the Office for Budget Responsibility (OBR) said.

But after that it will fall back sharply, averaging 7.4 per cent next year as a whole and just 0.6 per cent in 2024. By 2025 prices will fall, with the OBR predicting deflation of 0.8 per cent, driven by the falling cost of energy and food.

Deflation is usually bad news for an economy as it signals a weakness in a nation’s financial health, but it would come as a relief for households that will have endured two years of falling living standards. By 2027 inflation will have picked up again to 1.7 per cent, the OBR said. Chancellor Jeremy Hunt added: ‘High inflation is the enemy of stability. The OBR confirm that because of our plans, the recession is shallower and inflation is reduced.’

The Energy Price Guarantee, brought in by former prime minister Liz Truss and extended yesterday by Mr Hunt, has kept a lid on inflation by limiting typical annual energy bills to £2,500 this winter and £3,000 from April. Without this, peak inflation could have surpassed 13.5 per cent. The Bank of England has raised its base interest rate to get inflation under control. This should encourage saving rather than spending, putting a lid on prices.

But it also makes borrowing more expensive for households and the Government, which must service its £2.4trillion debt.

The Bank has lifted its base rate to 3 per cent, a 14-year high, and is expected to bump it up to 3.5 per cent next month.