Cost of living set to tumble

Prices rose by 5.2 per cent in the year to September, according to latest official inflation figures, but will grind almost to a halt over the next year, say City economists.

The rate of inflation is set to drop because of the threat of recession and the tumbling price of oil. This will allow the Bank of England to cut base rates from 4.5 per cent to 2.5 per cent, the lowest since 1951, said Jonathan Loynes of forecasters Capital Economics.

By mid-afternoon the FTSE-100 was 16.5 higher at 4273.4 but on Wall Street the Dow fell 55.12 points to 9332.44.

Gordon Brown's growing reputation as a global statesman received another boost when President Bush copied his bank rescue package.

The US version of the "Brown plan" will see $250 billion spent buying shares in eight of America's biggest banks.

The Prime Minister is even being urged by Labour MPs to call a snap election to capitalise on his success in handling the economic crisis.

One former minister told the Evening Standard: "He should not let the chance slip through his fingers if there is a chance of winning — or even just a chance of preventing the Tories from winning outright. This may be his last chance to go for it before the recession takes hold in a big way."

A looming recession and the falling price of oil means that inflation has almost certainly peaked and could drop to as little as one per cent within a year. That could pave the way for the lowest interest rates in almost 60 years.

The latest forecasts came on another encouraging day for the City following yesterday's historic £37 billion rescue of high street banks Halifax Bank of Scotland, Royal Bank of Scotland and Lloyds TSB. The three-month Libor, the rate at which banks lend to each other, fell from 6.26875 per cent to 6.24875.

The rise in confidence came despite the official measure of inflation, the Consumer Prices Index, hitting its highest level since 1992.

But the City was cheered by the first drop in the rate of food price rises since March. They went up by 12.7 per cent, compared with 14.5 per cent in August. A record global wheat harvest is expected to lead to further sharp falls in food inflation. The increase in the headline inflation rate was driven by huge annual rises in the cost of energy over the past 12 months.

Gas prices were up almost half and electricity by almost a third. But energy is expected to remain steady or come down over the winter and petrol prices are already 15 per cent lower than at their peak.

The signs of falling inflation are already obvious in the battered high street with many chains going straight into autumn sales only weeks after their summer promotions ended.

Most economists expect inflation to return to its target rate of two per cent by next autumn and could go as low as one per cent.

Some even fear that Britain is heading for a period of falling prices, or deflation, giving the Bank of England the excuse to cut the base rate to levels not seen since 1951 when Sir Winston Churchill was Prime Minister.

Jonathan Loynes, chief European economist at Capital Economics, said: "We expect interest rates to drop to 2.5 per cent or less."

For the third of borrowers on tracker rates that would mean another £120 off monthly repayments on a typical London mortgage of £200,000.

It would also inevitably feed through to the fixed rates on offer in the market. The three "state-owned" banks have already pledged to maintain the flow of competitive lending to first-time buyers as part of the bail-out deal.

Stephen Robertson, director general of the British Retail Consortium, said: "The good news is these figures show we have passed the peak of food inflation retailers are rushing to pass on the benefits of slowing inflation for produce at the farm gate and falls in world costs, such as oil and wheat."