Prices fall on the high street for first time in 50 years

The retail Price Index has registered its first negative reading since 1960 as the recession drives prices lower. Prices fell by 0.4 per cent in the year to March, down from nil in February.

The fall in interest rates and house prices and the cut in VAT have been responsible for much of the drop in the index since last September, when the rate peaked at 5 per cent.

Last month, lower food inflation and gas bills also contributed to easing the cost of living in Britain.

The Consumer Price Index, which excludes housing costs, was also lower, showing an annual rate of 2.9 per cent, down from 3.2 per cent in February.

Both measures of inflation are expected to decline even further this year, reflecting lower world energy prices and the radical cuts in interest rates.

As the Government prepares to deliver an unusually austere Budget, ministers will welcome the news as an indication that the Bank of England can continue its policy of "quantitative easing" (or printing money), to stimulate the economy and push the CPI back up to the Government's target of 2 per cent next year.

Prices have not fallen on a consistent basis since the early 1930s – a "deflation" that the Bank of England and the Government are trying hard not to repeat.

However, some economists also point to the effects of the near 30 per cent depreciation of sterling since its peaks in 2007, pushing annual "core" inflation – which doesn't include seasonal and volatile items such as food and petrol – up slightly from 1.6 per cent to 1.7 per cent. The Bank of England policymaker Andrew Sentence cautioned yesterday: "The recent data suggests that the downward momentum of inflation in the short term may not be as strong as we thought in February – probably because of the very marked depreciation in sterling since the summer of 2007."

The UK's inflation, on the international CPI measure, is still much higher than the US (-0.4 per cent) or the eurozone (0.6 per cent). However it is the RPI that is used to up-rate many social security benefits, national savings certificates and government securities. Its collapse may have its most significant effect in pay bargaining, the RPI being the traditional benchmark for wage negotiations. Many employers are already seeking pay cuts, with or without a commensurate reduction in hours worked.

The TUC general secretary Brendan Barber said: "This shouldn't be the signal for employers across the country to seek wage freezes or cuts in pay.

"Many companies are still profitable and able to afford decent pay rises. Wage freezes would prompt families to cut back on spending, the last thing the struggling economy needs right now."