Forecaster Capital Economics said the Consumer Prices Index (CPI) inflation rate could fall 1.5% below the official target of 2% because of the impact of falling oil prices and low economic activity.
Roger Bootle’s firm said in a note the near-term inflation outlook had improved recently, with CPI falling to 2.8% in May, the first time it has been below 3% since late 2009.
Capital Economics expects it to continue to fall sharply, possibly reaching a low of 0.5%.
It said: “It will come under further downward pressure from the recent drop in oil and petrol prices. And we still expect core inflation to fall sharply. Although the core rate nudged up in May, this reflected base effects – the seasonally adjusted monthly change was weak.
“Inflation could now fall as low as 0.5% or so at the start of next year.”
Inflation has been coming down steadily in recent months, with May’s reading the first time for over two years that the Bank of England did not have to write a letter to the Chancellor to explain why it was so far above the official target of 2%.
Despite an aggressive stimulus programme from the Bank, which has seen it pump in £325bn into the economy to offset falling trade and slowing growth, inflation has continued to fall.
