SIMON LAMBERT: Deflation wasn't the authorities' plan so enjoy it while it lasts - because it's inflation that our leaders want

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Britain is in deflation. It's only a tiny bit of good deflation, according to those in the know, but average prices are falling.

The 0.1 per cent annual dip on the consumer prices index measure of inflation this week was a momentous event.

CPI figures only go to 1989 in their extrapolated format but statisticians - who have worked the numbers back - say you would have to go all the way back to March 1960 to find the last bout of deflation on the index.

All shook up: The UK last experienced deflation in March 1960 just when Elvis Presley left the army, but Bank of England Governor Mark Carney says we should 'enjoy it while it lasts'

That was the year Prince Andrew and Jeremy Clarkson were born, Elvis Presley finished his military service and Cliff Richard, Adam Faith and the Everly Brothers ruled the UK pop charts.

At that time Harold McMillan was prime minister, the man who had delivered the famous ‘you’ve never had it so good speech’ a few years earlier.

That highly astute operator, Bank of England Governor Mark Carney, has echoed this sentiment with his ‘enjoy it while it lasts’ picture of today’s non-inflationary environment.

Wages are rising above the cost of living, savers are getting a real return, and the pound in your pocket buys more.

We’re a long way from McMillan’s post war glow of prosperity, but those effects are a welcome diversion from the falling real wages, savings returns and stubborn inflation seen since the financial crisis. 

The Chancellor George Osborne has also been out welcoming our little bit of good deflation. At a casual glance you would think this bout of falling prices was what we were aiming for all along. It wasn't.

That's why Mr Carney says enjoy the moment. It’s forecast to be a brief respite.

Inflation will be back when falling energy and petrol prices fall out of the equation and the supermarkets eventually stop duffing each other up.

The consensus is that inflation will be back at 1 per cent at the end of this year and on its way back to the 2 per cent target next year.

That may not happen, it might just be that we are being too complacent on deflation, another sharp reverse for the oil price is not unthinkable.

The return of inflation seems fairly likely though.

All who fill up their car, will certainly have noticed petrol prices jumping back up. Supermarkets will need to stop their race to cut prices at some point. Are energy companies really going to cut prices two winters in a row?

A return of inflation would mean two important things for our finances.

Record low mortgage rates are likely to start vanishing and savers will find lowflation stops helping them beat low returns on cash.

A shift upwards in the absolute lowest mortgage rates is already occurring as expectations of deflation ease and the bond market wobbles.There are still plenty of ultra-low rates about – you can fix for five years now at the same rate as you could have fixed for two a year ago – but at the margins the cheapest rates have risen.

HSBC pulled its 1.99 per cent five-year fix, Woolwich has removed its same rate.

This may just be a blip, or it could be the beginning of the end for the cheapest ever mortgage rates. Almost undoubtedly, they will still remain low – they just won’t be quite as low as now.

For savers, a rate rise delivered in response to higher inflation expectations would feel welcome. The best easy access rate pays a measly 1.5 per cent at the moment. Yet, at the moment that is a 1.6 per cent real return.

If interest rates rise to 0.75 per cent, some very generous banks may hand over the full 0.25 per cent to savers (don’t hold your breath on that one). 

But if inflation is back at 1.5 per cent by that point, an easy access account would be delivering a real return of just 0.25 per cent.

The return of inflation would put us back on the financial repression plan to deal with national debt. Inflation will eat into the debt, savers will be discouraged from hoarding cash and borrowers will still get cheap money.

Where we stand now was not the point of spending more than six years with a 0.5 per cent base rate, printing money to the tune of £375billion worth of quantitative easing, and handing a load of practically free cash to banks to lend out through funding for lending.

Deflation is exactly what we were trying to avoid. To get out of the hole the UK's debt-ridden finances are in, we need inflation. 

Despite the welcoming words from the Chancellor and Bank Governor, deflation hasn’t been the plan all along. 

In fact, what the authorities really want is inflation, so position yourself for its return.