Inflation falls to lowest level in seven months - thanks to falling fuel prices

Consumer Price Index (CPI) inflation dropped from 2.8 per cent in April to 2.5 per cent last month to stand at its lowest level since last October, according to the Office of National Statistics.

The bigger than expected fall in the Government's official measure of inflation came as recent price cuts from major UK energy firms filtered through to customer bills compared with steep price hikes last year. Economists had expected CPI to fall by 0.2 per cent to 2.6 per cent last month.

Gas and electricity prices rose at the slowest rate since October 2004, the figures revealed, knocking more than 0.2 per cent from the headline CPI rate.

Despite the fall, the Bank of England predicts that interest rates will have to rise again to 5.75 per cent to bring CPI back to the Bank's 2 per cent target for inflation by the end of next year.

Falling food costs also helped stem inflation, largely due to lower vegetable and meat prices - with big falls in tomatoes, lettuces and cabbages amid increased supplies and lower demand compared to last year.

Cheaper vegetables more than offset increasing prices for bread, cereals and fruit while the falling cost of clothing - notably jeans and skirts for women - also helped CPI ease back.

Meanwhile the biggest inflationary pressures came from the sharpest increase in transport costs since last July, particularly driven by rising transatlantic and European air fares.

The Retail Price Index - seen as a more representative measure of inflation as it includes mortgage payments - fell to 4.3 per cent in May from 4.5 per cent the previous month.

The falling energy and food prices also drove the fall, despite rising mortgage payments as some lenders passed on last month's quarter-point rise in interest rates.