THE 12-month downward spiral in inflation will reach its lowest point this week, according to economists. The Consumer Prices Index, the most common marker of inflation, is expected to dip to 1.3 per cent from 1.6 per cent when September figures are released, but economists are confident this will mark the bottom of the year-long falls.
The CPI has dropped steadily from its peak of 5.2 per cent in September 2008. There had been fears at the height of the economic downturn that Britain would fall into deflation, but economists expect that the resumption of the 17.5 per cent VAT rate
in January will push inflation up to around the Bank of England's 2 per cent target.
Howard Archer, chief European and UK economist at IHS Global Insight, said the weakness of sterling will also cause inflation to creep upwards in the short term. He said the CPI could even hit 2 per cent before the end of the year.
"Annual consumer price inflation is likely to rise temporarily back above the Bank of England's 2.0 per cent target at the end of 2009 and in early 2010," Archer forecast.
"However, we believe that annual consumer price inflation will still be under 2.0 per cent for most of 2010 as substantial excess capacity, only gradual recovery, high unemployment and a bottoming out in sterling have a dampening impact."
Philip Shaw, chief economist at Investec, said the stabilisation of the CPI may persuade the Bank's Monetary Policy Committee to decide against further quantitative easing (QE).
He said: "In August, Governor (Mervyn] King forecast inflation falling 'quickly', with the chances of it dropping below 1 per cent as 'more likely than not'. If this no longer looks likely, we wonder how keenly certain MPC members would pursue additional QE."
Shaw blamed oil prices and the government's increase in fuel duty for September's fall in inflation.
He said: "The relatively high level of oil prices pushed petrol costs higher last month and September's drop was offset by the 2p fuel duty increase at the start of the month."
