If the dark clouds hanging over Britain's growth prospects for the coming year have a silver lining, it is that they might finally help the Bank of England get inflation back to its 2 percent target for the first time since late 2009.
Even economists who are typically unimpressed by the Bank's inflation-fighting prowess believe dismal growth over the coming year -- combined with the reversal of one-off effects currently raising prices -- will cause inflation to tumble from its current three-year high of 5.2 percent.
However, the fact that the economy has to be on the brink of recession before inflation returns to target does little to ease their longer term worries about the competitiveness of British business and strong underlying price pressures.
We've all been surprised by how sticky UK inflation has been ... and people are right to be cautious that this will continue to be its main characteristic. What stops me getting too hawkish is simply that I have very weak GDP projections, said Ross Walker, an economist at Royal Bank of Scotland.
Economists polled by Reuters last month, just after the Bank restarted its quantitative easing programme to boost the economy, saw growth of only 1.3 percent for 2012, compared to 1.0 percent this year -- less than half Britain's pre-crisis trend rate of growth. Inflation for the fourth quarter of 2012 is seen at 2.1 percent.
The prospect of sharply falling inflation was a precondition for the Bank to start its second round of QE, and Bank deputy governor Charlie Bean said on Thursday that without the extra stimulus, inflation would be well below target in a couple of years.
That said, weak growth and recession over the past three years has not led to as much downward pressure on prices as some Bank policymakers and private sector economists expected.
Britain looks like an oligopolistic economy, said Walker. We have 5-6 big utility providers, 4-5 big banks, 4 big supermarkets. It's not that there isn't competition -- there is some -- but markets tend to be dominated by a small number of large players. That seems to influence pricing behaviour.
How much this actually influences pricing is hard to assess, however. For example, energy regulator Ofgem said in a recent report that energy companies were failing consumers by stifling competition through a combination of tariff complexity, poor supplier behaviour and lack of transparency.
But although the cheapest gas supplier charged about 10 percent less than the average price paid by consumers, this difference is dwarfed by the 40 percent rise in overall gas prices over the past year.
Similarly, retail analysts did not believe that supermarkets could easily raise prices without consumers going to competitors, and said firms found it easier to preserve margins by putting pressure on suppliers or promoting own-label goods.
Retailers have had to raise their prices to a degree because they've had nowhere else to go, said Richard Hyman, a strategic advisor to the consumer business practice at consultants Deloitte. But if you were to apportion it in percentage terms, I think retailers in the whole of the inflation game would be bit-part players, he added.
GLOBAL PRICE PRESSURES
The one issue where macroeconomists and company analysts did agree was that British inflation was increasingly driven by global rather than domestic trends.
This increases the amount of slack in the economy -- idle businesses and unemployed workers -- needed to push down inflation by a given amount, and makes it increasingly hard for the Bank to control inflation without having a disproportionate effect on the domestic economy.
The UK doesn't produce the range of consumer goods that consumers actually demand, so with the need to import those you are naturally exposed to global inflationary pressures, said Nomura economist Philip Rush. The risks around that are to the upside, with emerging market growth much stronger than we can dream of in the UK.
And while most economists expect oil prices to remain flat for the immediate future due to a weak global growth outlook, in the longer term there is strong upward pressure on energy prices from emerging market demand.
However, in the short term the Bank does have some powerful arguments when it predicts that inflation will fall rapidly, and is likely to broadly stick with its August forecast that inflation will fall to 2.0 percent by the fourth quarter of 2012 when it updates its Inflation Report later this month.
As the Bank regularly points out to critics, much of the year-on-year rise in prices to date has been due to January's sharp increase in sales tax, as well as a 70 percent rise in oil prices in the six months to May, which has steadily fed into household energy bills as utilities put up prices.
Once these factors start to drop out of annual inflation figures next year, this should knock 2.5 percentage points off the headline inflation rate, according to an estimate from Bank policymaker Adam Posen last week.
Few economists significantly dispute this figure, but other things being equal, it would still leave inflation nearer three percent than two. Instead, where the real debate lies is in how much of a downward push will be given to inflation by weak growth, or even recession.
The Bank is relying on large amounts of excess capacity to increase competitive pressures in firms and drive down prices. That is basic economics and should have an effect, but we don't think it is going to be quite as dominant as the MPC seem to assume, said Nomura's Rush.
And those economists who do see a big fall in inflation -- such as Brian Hilliard of Societe Generale -- base their projections on a big rise in unemployment.
There will be a steady increase in unemployment and that will help get unit labour costs down, he said, predicting a rise in unemployment to 9 percent of the workforce from its current level of 8.1 percent.
(Additional reporting by Mark Potter; Editing by Toby Chopra)