Inflation level set to be negative

Figures for last month are expected to show the measure of inflation used in wage deals turned negative - the first time this has happened in 49 years.

Economists expect the Retail Prices Index (RPI) inflation, which are vital for pension payments and wage negotiations in the private sector, will have declined to minus 0.7% in February, from 0.1% in January.

As well as it being the first time the reading has been negative since March 1960, it would also make it its lowest point since a record minus in June 1959 of 0.8%.

The Consumer Prices Index (CPI) - which does not include housing costs - is expected to show another drop, falling nearer to the Government's target of 2%. CPI is thought to have been 2.6% in February, compared with 3% in January.

The ONS figures are set to stoke fears over a period of deflation in the UK, which can be damaging for the economy as it discourages spending and can lead to a vicious circle of lower prices and demand.

While the UK is not seeing deflation yet in the official measure, negative RPI will have serious implications for the UK, not least because of its role in wage settlements.

It is also used as the basis for annual rises in State pension payouts and other benefits, as well as annuity payments for private pensions, plus rates for index-linked savers among others.

RPI has been dragged down more than CPI because it also includes mortgage payments and housing costs.

Slumping property prices and the Bank of England's dramatic interest rate cuts which have left borrowing costs at a historic low are therefore largely behind the RPI fall.

David Page, economist at Investec, forecasts RPI to remain negative for the majority of the year, although he said this does not necessarily mean wage cuts.

"We'll likely see average earnings start to slow and come down, although firms will find it hard to push through wage rises at a lower level than 1% or 2%, he said.

CPI is also under pressure as the bursting of last year's oil price bubble has seen fuel costs plummet, with energy bills likewise declining.