Inflation in Britain is set to fall back below 5% in October down from a 16-year high, thanks chiefly to lower petrol prices.

The annual growth rate in the consumer prices index (CPI) - the official measure of the cost of living - climbed to 5.2% in September, the highest since 1992, due to spiralling energy costs. Most economists believe annual inflation fell back to 4.8% last month. They also expect inflation to have declined between September and October, the first monthly fall in more than a year.

The wider retail prices index (RPI) measure, which includes housing costs, is expected to have dropped to 4.6% from 5.2%. It is usually used as the basis for pay negotiations.

Oil prices are now less than half the peak of $147 a barrel reached in the summer, and petrol prices have fallen in turn. Sharp rises in food prices earlier in the year have also begun to reverse. Other effects set to reduce inflation will be the contrast with the big jump in mortgage arrangement fees seen in October last year in the wake of the credit crunch, said Investec economist David Page.
"October looks likely to post something of a reversal," he said, although he pointed to the potential inflationary impact of the pound's sharp recent slide against the dollar and the euro.

Last week the Bank of England warned Britain's recession would be deeper and longer than it previously expected, and highlighted the risk of deflation when it published its latest projections for the economy. Bank governor Mervyn King said it was "very likely" that RPI will turn negative next year as mortgage payments come down.

More interest rate cuts are set to come on top of the Bank's bold 1.5 percentage point move to 3% two weeks ago as its latest forecasts show inflation falling below its 2% target next year and maybe even to 1% if borrowing costs are held at current levels.
A long period of deflation would be a serious threat because it would encourage consumers and businesses to hold off spending in expectation of falling prices. Prime minister Gordon Brown told the House of Commons yesterday: "Next year, the problem is deflation and the problem of inflation close to zero."

Howard Archer of Global Insight expects inflation to drop to just 0.5% next year. "Inflation is poised to drop like a stone over the coming months due to lower oil, commodity and food prices, very favourable base effects and rapidly diminishing underlying inflation pressures," he said.