Inflation slump will continue into next year

Millions of British workers are facing pay freezes or cuts after the Chancellor forecast deflation will last into next year.

Alistair Darling today warned that the Retail Prices Index could fall to minus 3% in September and not move back above zero until 2010. Many firms use RPI to set wage rates and the Budget prediction could see them hacked back.

The index also determines benefit levels and the basic state pension, although Darling today pledged that "pensions will rise in real terms".

The Chancellor's comments came a day after official figures showed RPI, which includes mortgage costs, dropped from zero in February to minus 0.4% in March. The Consumer Prices Index, the Government's preferred measure, fell from 3.2% to 2.9% — still well above the 2% target. Darling said CPI would fall to 1% at the end of the year.