UK inflation predicted to fall to lowest level in 25 years

Forecasters claim falling cost of oil and supermarket price war will drag inflation down to 0.4%

Inflation is expected to fall to its lowest level in at least 25 years as the dramatic plunge in oil prices and the supermarket price war drag down the cost of living.

Analysts expect the Office for National Statistics report released on Tuesday at 9.30am GMT to show that inflation dropped to 0.4% in January. This is down from the 0.5% recorded in December and well below the Bank of England’s 2% target.

The combination 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.

It is hard to find a labour market indicator that has not brightened. Beyond those in our chart: average hours have risen since 2012; most of the jobs created over the past year have been for full-time employees. Underemployment remains higher than unemployment, but the former has nevertheless fallen markedly from its peak.

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.

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