Next year will see inflation fall sharply as oil and energy prices respond to the mounting global recession, according to the Bank of England.

Experts say inflation could even turn negative to create the first bout of deflation since 1960 - the year John F Kennedy won the race to become US president.

Shoppers saddled with debts built up in the good times will be faced with balancing more buying power for the pound in their pocket against falling wages.

The only inflation silver lining for homeowners is that the value of big debts such as mortgages is eroded more quickly.

But the opposite is the case with deflation, which can lead to spending being deferred amid expectations that prices may fall even further.

Meanwhile, benefit and pension payments are also pegged to the cost of living, and a period of deflation next year may herald much smaller increases for millions of people.

And the impact of a severe recession on prices could spark a prolonged period of deflation to match that seen by countries such as Japan.

The volatile path of inflation in the past 18 months - and its likely descent over the year ahead - was unprecedented during the whole of the Bank's first decade of independence.

Governor Mervyn King has to write a letter of explanation to the Chancellor whenever the Consumer Price Index (CPI) rises or falls more than 1% above its 2% target.

The prospect of several letters on the way up - two so far and a third due next month - is now matched by the possibility of more missives on the way down late next year as energy and commodity prices slide and demand falls in a recession.

The all-time low for the CPI was 0.5% in May 2000, although at the time the Bank's Monetary Policy Committee was tracking the more inclusive Retail Prices Index, then reflecting rising house prices.

Capital Economics' chief European economist Jonathan Loynes said: "The forces that have lifted UK inflation sharply higher are now set to work strongly in the opposite direction."

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