Knightley told delegates at the Finance Planning Group’s annual conference last Friday that inflation should plunge this year and even fall as low as 1% by the end of 2012 or turn of next year.
He said that with house prices dropping and energy costs stabilising, this should drive down the Consumer Price Index (CPI).
“The economic weakness and a softer labour market means wages are not doing great. If inflation falls between 1 to 2%, this could mean that real wages rise for the first time in five years,” said Knightley.
UK inflation slowed to 4.2% in December, the lowest level for six months, down from 4.8% in November.
In the Bank of England’s latest quarterly inflation report, it said that a “severe downturn in the UK’s economic fortunes will help push inflation below 2%” this year and stay below that target until 2014.
The prospect of low growth and low inflation this year is also expected to take the pressure off the bank’s monetary policy committee (MPC) to raise the base rate from the historically low level of 0.5%.