All eyes will be on the latest figures for inflation, due next week.

A month ago it was revealed that inflation dropped to 0.3per cent in January, down from 0.5per cent in December and the lowest level since records began. The rate of inflation is now well below the government's target of 2per cent and the fall in the consumer prices index (CPI) prompted the Bank of England to suggest that inflation could temporarily turn negative in the spring. In other words, we could enter a period of deflation.

The recent falls in inflation have largely been driven by lower oil and food prices. The oil price, for example, has roughly halved over the past year. Food prices have also come down, helped by a supermarket price war.

The result, according to many experts, is good deflation. Adrian Lowcock, head of investing at AXA Wealth, says: "When petrol prices are low, companies can reduce costs and increase underlying profits. Households also benefit because they do not have to spend as much at the pump, so it's a bit like a pay rise. With food prices also falling, the household budget gets an additional boost."

Good deflation perks up the economy, too. Consumers spend more money, so companies make more money. Everyone is happy. Alan Higgins, UK chief investment officer for Coutts Bank, says: "UK consumer inflation has slumped to its lowest level in decades and is liable to fall further still. We agree, though, with Bank of England Governor Mark Carney that this phase of subdued inflation is 'unambiguously good' for the UK economy - and distinct from deflation."

He said wage growth - long the missing link in the UK recovery - was picking up. Total average weekly earnings were up 2.1per cent in December from a year earlier, the fourth successive month they had outpaced inflation.

The eurozone is facing the same issues, though last week it emerged that deflation was not as bad as expected in February, with "core" inflation steady at 0.6per cent.

Problems could start to arise if deflation became more widespread and more persistent. At the moment, for example, prices for items such as furniture and clothing are still rising. But if they should fall, consumers could stop spending in the hope of further price drops. Why buy a TV now if you think it will be cheaper in six months? Company profits would therefore take a hit and the economy would stagnate. The government would also suffer because lower prices and potentially lower incomes would result in smaller tax revenues. That's bad deflation.

Unfortunately, bad deflation is more common than good - and once you step onto a deflationary cycle, it's very difficult to get off.

Most experts agree that a prolonged period of bad deflation is unlikely. But our guide shows you how to make the most of good deflation and how to shore up your finances in case it turns nasty.

Savers

The fall in the rate of inflation is a welcome fillip for savers because it makes their money go further. For example, in December when inflation stood at 0.5per cent, 484 savings accounts paid a positive rate of return after basic rate tax. When inflation dipped to 0.3per cent in January, the number rose to 552. Fixed-rate bonds look particularly attractive in deflationary times because you earn a fixed amount on your savings when prices are falling. Sue Hannums, director of Savingschampion.co.uk, an independent savings advice site, says: "Low inflation is potentially good news for savers, but any celebrations are very muted. Savings rates are still falling and a high proportion of people are earning less than the rate of inflation on their accounts."

NS&I index-linked savings certificates are not on general sale at the moment, but if you already have money in the plans, it's probably worth checking up on the details. The certificates pay tax-free interest of 0.05per cent plus inflation. They are, however, linked to the retail prices index, which is currently higher than CPI at 1.1per cent.

Investors

The UK stock market doesn't seem too worried about the prospect of deflation. This month, the FTSE 100 finally broke through the record peak of December 1999, beating its previous highest closing price of 6930.

But deflation is traditionally the enemy of equities because it signals a lack of growth. Investors should therefore pick their stocks with care. Tom Stevenson, investment director at Fidelity Personal Investing, says: "Businesses that can pay a high and sustainable dividend will be relatively attractive. In an environment of low interest rates, in which falling prices mean your cash goes further, the dividend yields of 4per cent and higher within the FTSE 100 look very appealing.

"Of course, the key word is 'sustainable'. If companies start to struggle because of reduced demand for their goods and services then their ability to pay that attractive dividend will reduce. And if companies feel obliged to keep paying a high dividend to attract investors then they are likely to prioritise payouts to shareholders over investment in their business. In the long-run, this is obviously bad news."

Pensioners

Anyone in receipt of the basic state pension is protected against falling prices by the triple guarantee.

The legislation states that the basic state pension will rise each year by earnings, CPI or 2.5per cent, whichever is highest. So, if inflation dips below 0per cent, the basic state pension will go up by at least 2.5per cent.

It's worth checking the terms of your policy if you have an annuity that is linked to inflation. Index-linked annuities are more expensive than level annuities because the income you receive rises each year to keep pace with inflation. Most index-linked annuities are linked to RPI, but if RPI drops below 0per cent, then your pension income could also fall.