Is the UK poised for deflation?

Price cuts: Here to stay?

		Rodney Smith BBC business reporter

"Startlingly low levels over the next 12 months." That is what one London economic forecaster is saying about the outlook for British inflation.

There is nothing new about deflation if you live in Japan, or in Argentina.

But Britain? Unlikely. After all, in Britain, the Bank of England has a symmetrical inflation target.

The Bank's monetary policy is meant to adjust circumstances in the economy so that inflation is kept between 3.5% at the upper limit, and doesn't fall through 1.5% at the lower limit.

This symmetrical inflation target is the envy of foreign economy managers, and is frequently called for in other economies.

If the target is not met, the governor of the Bank of England, Sir Edward George, is famously required to write to the treasury secretary, the chancellor of the Exchequer, explaining why the Bank failed in its duty.

Prophetic book

But now the independent forecaster run by one of the Bank's own former economic advisers, Roger Bootle's Capital Economics, suggests that Britain could join Argentina and Japan, and inflation could turn to deflation before the new year is out.

Mr Bootle's book, "The Death of Inflation," forecast that the inflation menace that dogged the developed world throughout the 1970s, 1980s and into the 1990s would eventually be defeated - as has happened.

Now Mr Bootle's colleague Jonathan Loynes has been making a case to clients that the fall we have seen in core goods inflation in Britain recently is likely to be joined by falling food prices - on top of the seasonal decline in the spring.

He might have added that in some analyses, oil and energy prices are not likely to pick up in the coming year, and could fall.

Set against this, retail sales have been more than usually buoyant in the run-up to Christmas.

But Mr Loynes believes that fierce competition in the High Street is limiting the scope for retailers to increase margins, so increased sales are not having the expected effect of allowing some price inflation.

Close enough

Capital Economics predicts British inflation at 0.4% next year - well below the 2.4% expected by big banks such as Credit Suisse First Boston.

"But 0.4% is clearly close enough to zero to mean it would not take much weakness in food or oil prices to deliver deflation," Mr Loynes says.

Mr Bootle has talked about writing a sequel to "Death of Inflation."

Maybe he should call it "Here Comes Deflation." And write it soon.