The Wall Street Journal are reporting that Apple currently have plans to release a cheaper version of the iPhone sometime later this year. As usual, it's according to people briefed on the matter who have said "the cheaper phone could resemble the standard iPhone, with a different, less-expensive body."
WSJ does back up their huge rumor with "Apple could decide not to move forward with the device". I don't think we'll see a "cheaper iPhone", maybe an iPhone mini or a larger device pushing the current- or next-gen iPhone down in price. A cheaper-made iPhone? Wouldn't that take away all of the credit Apple have built over the years for making the best-made smartphones in the world?
I think we should see the current iPhone become $299 to compete with the incredible Nexus 4 at the same price - and then have Apple introduce the iPhone XL at 5 inches. Yes, that's what should happen.