- 17 updates
Britain could experience negative inflation over the coming months without any significant risk to the economy, the Chancellor is expected to say.
In a speech to the Royal Economic Society tomorrow, George Osborne will say the slump in the headline rate to just 0.5% is due to external factors - and that the benefits for consumers should be celebrated.
"Of course we will always remain vigilant to ensure that inflation is low for the right reasons," Osborne's speech reads.
"Rising real incomes, a recovery spreading to all parts of our economy, and family budgets that can stretch that little bit further - let's celebrate these effects of low inflation, not fear them."
The inflation rate is now down to just 0.5%, meaning Bank of England governor Mark Carney must write to the Chancellor explaining the situation.
Watch Mr Carney speaking to ITV News Business Editor Joel Hills about why inflation is so low and the prospects for the British economy.
David Cameron has insisted the UK does not face the prospect of "potential deflation" seen on the continent.
Earlier Bank of England governor Mark Carney told ITV News there was a "possible" risk of deflation in the UK, but said it could be managed.
The Prime Minister told Heart radio that Britain's low inflation rate of 0.5% was due to a lower oil price "which is going to see lower petrol prices and diesel prices at the pumps".
Deflation in the UK is "possible" but a risk that can be managed, Mark Carney has told ITV News.
Bank of England governor Mark Carney said the fall in inflation is good news for British households in the short term but said it was their responsibility to ensure the price falls didn't become more generalised.
"The good news is that we have the means and the will and the responsibility to get inflation back up over the medium term within two years lets say to that 2% inflation target and we will do that," he said.
The Bank of England's Mark Carney has promised "low and stable " inflation.
Speaking to ITV News, Mr Carney said he would be writing to Chancellor George Osborne after official figures showed inflation had fallen below 1% and would expect to have to write "at least another".
Bank of England governor Mark Carney has told ITV News people can expect a "gradual and limited" interest rate increase over the next few years.
But he refused to be drawn over when an increase would happen.
Analysts have said UK households could enjoy a 1% boost to their incomes this year due to the low inflation rate.
Paul Hollingsworth, from Capital Economics, said the fall was down to temporary, external factors like cheaper oil prices rather than a weakness in the UK economy.
He said there was little risk of it becoming a problem, like in the Eurozone, because the British economy is performing well and wages are starting to increase.
Lower petrol prices were among the main factors behind the fall in CPI inflation, The Office for National Statistics has said.
The average price of petrol now stands at 116.8p for petrol and 122.9p for diesel - 24.8p below the peak prices seen in April 2012.
Chief Secretary to the Treasury Danny Alexander said the fall in oil prices is equal to a giant tax cut for the UK.
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Official figures have shown inflation fell to 0.5% in December from 1% the previous month - but what does that mean for the UK?
My take on the letter Governor Mark Carney will be writing to Chancellor George Osborne over missing the official inflation target.