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And at last, the long awaited and frustratingly elusive decline in the UK’s inflation rate is underway.

It should come as no surprise. As I mentioned here a couple of weeks ago, (see  2012: the year when inflation dives ) the runes were there for all to see.

Non-food shop price inflation was just 0.3 per cent in the year to December, according to BRC and Nielsen.  It also had food inflation on the decline.

But yesterday, the proper, official inflation data was out.

The annual rate of CPI inflation was down to 4.2 per cent, from 4.8 per cent in November and 5.2 per cent back in September. Inflation, as measured by the RPI index, was 4.8 per cent, compared with 5.6 per cent in September.

Core inflation – that’s CPI minus food, energy and tobacco – was 3.0 per cent.

More to the point, next month is when the effect of last January’s VAT hike drops out of the figures. Estimates suggest that the rise in VAT from 17.5 to 20 per cent put a full percentage point onto inflation.

So, theoretically, expect CPI to be around 3.2 per cent, and core inflation to be around 2.0 per cent next month.

If anything, however, I may be erring on the upside.

According to recent producer prices data, which is a good forward indicator, manufacturers input prices fell by 0.6 per cent in December, while output prices dropped by 0.2 per cent. On a year on year basis, both input and output prices are now at their lowest levels for some time.

I have previously predicted that inflation will fall to 1.5 per cent by the year’s end. And I am sticking to that view.

But looking further forward, the picture becomes less clear.

In November, the Ernst and Young Item Club released a report suggesting that the inflation outlook for the next five years is not so rosy. While it forecast falls in the price of oil, food and commodities in general this year, it predicted rises in 2013 and beyond. “Pressure from a growing population, combined with the ever present possibility of future supply side disruptions, will see UK food price inflation average 3.8 per cent a year until 2015, only slightly lower than the 4.7 per cent experienced over the last five years,” stated the ITEM Club in its report.

It does rather seem that the global economy has reached a stage now when it has become a lot more vulnerable to inflation. And as soon as growth returns to normal, prices may well surge.

I still reckon the domestic demand will remain low in the UK for a very long time, however.

The ITEM Club said that from next year, with inflation rising, the Bank of England will find itself in an increasingly difficult position. It said that the inflationary pressures will make it very hard for the UK’s central bank to justify low interest rates, but any hike may kill off growth.

However, I am not so sure the bank will face such a dilemma,  not for several years anyway. There will be very little domestic pressure on UK prices. Interest rates relate to domestic demand, and since I think it is unlikely domestic demand will be the cause of any new bout of inflation, there won’t be any need to up rates.

Except of course, interest rates also affect the value of sterling, and a cheap pound can lead to price rises. But then again, the UK needs a cheap pound in order for the export led re-balancing to occur.

I concede that inflation may return in 2013, or perhaps 2014, but I still think rates will stay at half a per cent for a few more years yet. In any case, if UK house prices eventually fall the way many expect, this may lead to deflation.

These views and comments are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees