Inf lation to fall below 1% for f irst time since 2002

INFLATION is set to drop below 1 per cent for the first time since June 2002 on the back of the falling price of food and fuel.

The figures for December, to be published tomorrow, will be hailed by ministers as evidence that the squeeze on family finances is finally coming to an end, with wages rising faster than prices.

The fall in inflation will fuel speculation that interest rates could stay at 0.5 per cent until late this year or even until next year in a boost for millions of borrowers.

Bank of England governor Mark Carney must write an open letter to Chancellor George Osborne when inflation moves more than one percentage point away from the 2 per cent target. So this week he will be forced to explain why the figure is so low – paving the way for interest rates to stay at rock bottom for longer than expected.

Howard Archer, chief UK economist at IHS Global Insight, said: ‘Inflation is likely to have been brought down further in December primarily by a marked fall in petrol prices … the ongoing supermarket pricing war should have continued to limit prices.’

He added that inflation ‘could very well get down near to 0.5 per cent in the early months of 2015’.

Last week, the Bank set interest rates at 0.5 per cent for the 71st month in a row – prolonging low returns for savers but providing further comfort to over-stretched borrowers.

Over the summer, it was thought the Bank might raise rates – for the first time since 2007 – before the end of 2014 or in early 2015.

But the sharp fall in inflation, a slowdown in the UK economy, and worries about the outlook in Europe and the rest of the world, has dampened expectations of an early rate hike.