UK inflation hits its lowest level in almost 15 years
British inflation plunged to its lowest level since May 2000 last month and Bank of England Governor Mark Carney said it looked set to fall further.
Official figures released yesterday showed the annual rate of consumer price inflation halved to 0.5pc in December from 1pc in November.
The tumble reflected a slide in global oil prices.
Coming four months before the general election, the UK government said it was good news for consumers, boosting their spending power after years of weak wage growth.
It also may delay any rate rise from the Bank of England if price falls spread beyond food and energy.
Most economists say Britain, where consumer spending remains strong and wages are starting to rise, faces less danger of deflation than the Eurozone, where falling prices have sparked fears of a Japan-style economic stagnation.
Mr Carney, inset, said that he expected inflation to drift lower in coming months, but then to return towards 2pc.
"A little bit of inflation is good for the economy," he told the BBC.
"We have the means at the Bank of England and the will and responsibility .. to bring inflation back up to the 2pc target."
Mr Carney added that he still expected interest rates to rise in the foreseeable future, though increases may be slower than once thought.
"It's a question of the pace of those interest rate increases, and the degree. Relative to a year ago, it is probably a little more gradual and a little more limited ... largely because of factors outside our shores."
Crude oil prices fell to their lowest level in nearly six years yesterday, pointing to further falls in inflation.
In November, the bank predicted CPI would reach its target of 2pc only towards the end of 2017. Financial markets are expecting the bank to start raising rates only in early 2016.
Economists had expected inflation in December to fall to 0.7pc. Sterling weakened after the data and was close its lowest level against the dollar in 18 months.
Mr Carney said the bank would look closely at Britons' inflation expectations, which at the moment show they think inflation will rise fairly close to the bank's 2pc target in coming years. Such expectations partially gauge whether consumers are minded to put off spending hoping for cheaper prices.
After years of prices rising faster than wages, the inflation data may help the Conservative/Liberal Democrat government combat criticism from the Labour Party that it has presided over a "cost of living crisis", one of the big political themes ahead of the May general election.
Economists flagged the possibility that British inflation could turn negative soon if oil prices - which have already fallen 60pc from their June 2014 peaks - fall further.
"But we reject any notion that the UK faces serious risk of harmful deflation," said Michael Saunders, economist at Citi.