The pound tumbled to a fresh six-month low against the euro today after inflation fell by more than expected to 1.1 per cent in September due to shrinking energy prices.

Sterling declined by 0.5 per cent, making one euro worth 93.8p, the weakest level since March, while the pound lost ground against the dollar at $1.5722

The consumer price index (CPI) measure of inflation fell from 1.6 per sent in the 12 months to August and the 1.1 per cent reading for September is below the 1.3 per cent expected by economists.

Inflation is now at its lowest rate since September 2004.

Today’s figures reinforce yesterday's prediction by the Centre for Economics and Business Research that interest rates will stay at their record low, of 0.5 per cent, until at least 2011.

Inflation fell on a steep 7.3 per cent decline in utility bills while food and non-alcoholic beverage prices shrank by 0.9 per cent in the year to September.

Core inflation, which strips out the effect of tobacco, alcohol, food and energy, shrank from 1.8 per cent in August to 1.7 per cent in September

The fall will lead to renewed fears that Mervyn King, Governor of the Bank of England, will have to write a letter to Alistair Darling, the Chancellor to explain the low rate of inflation.

The Governor is required to write to the Chancellor if the CPI rate of inflation is 1 per cent above or below the Bank’s 2 per cent target.

The Bank of England is keen to avoid a downward inflationary spiral, in which declining prices reduce companies profits, and, in turn, fuel the recession, reduce wages, increase unemployment and reduce the confidence of investors in UK plc.

The wider retail price index (RPI) measure of inflation, which includes mortgage payments, fell further into negative territory in September, from -1.3 per cent in August to -1.4 per cent, leaving millions of families, disabled people and their carers in danger of having their benefits frozen, unless the Chancellor intervenes.

Under current rules, the RPI measure for September is used to calculate the rise in benefits that are paid out from next April.

Ministers are hoping Mr Darling will step in to raise the most sensitive benefit payments, amid concerns a freeze would come into force before a general election next year.

However, a 1 per cent rise on the £170 million benefit bill could cost an extra £1.7 billion at a time when the Government is struggling to reduce public spending.

While there are fears that inflation could fall further, Howard Archer, chief UK and European economist at IHS Global Insight, believes that last month’s 1.1 per cent inflation is likely to mark the lowest point in consumer price inflation.

He said: “September will probably prove the floor in annual consumer price inflation as oil prices fell back very sharply in the final months of 2008 and in early 2009.

“Consequently, annual consumer price inflation is likely to rise back above the Bank of England’s 2 per cent around the turn of the year and it could near 2.5 per cent during the first half of 2010.”

However, James Hughes, chief economist at Black Swan Capital Wealth Management, believes that low inflation is here to stay.

“Ordinarily when governments print money, sell bonds, nationalise banks and go on an enormous quantitative easing (QE) spree, the eventual outcome is inflation,” he said.

“However, the UK’s problems, comprising a massive budget deficit, ageing population, unsustainable welfare system and uncompetitive exchange rate, are so deep and fundamental that the increased money supply is not yet feeding through to prices, and may not do so for some time.”

“My expectation is that inflation will be low to zero for up to the next two years, but could then very rapidly rise into double digit territory, just like the late 1970s,” he added.

The latest inflation figures come amid increasing uncertainty about whether Britain emerged from recession in the third quarter.

Earlier this month, there were growing hopes the country had left recession.

However, new data from the Office of National Statistics last week revealed an unexpected decline — of 2.5 per cent — in Britain’s industrial production in August, prompting economists to cast doubt on recovery.

Yesterday, the British Chambers of Commerce added its voice to the doubters, raising the possibility of a “double-dip” recession. The last time Britain experienced a "double-dip" recession was between the third quarter of 1990 and the second quarter of 1992.

It argued that although Britain would return to growth by the end of the year, the economy was in danger of declining again next year.

Britain’s first official figures for gross domestic product (GDP) during the third quarter will be published next Friday. GDP is the key measure of the health of an economy and is the market value of all goods and services made within a country.

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