Surprise inflation fall eases pressure on interest rises

• Number of people buying falls at fastest pace for 3-years

• First-time home buyers borrowing record amounts

Inflation fell sharply last month to leave the Bank of England's economists with egg on their faces - but homebuyers breathing a sigh of relief.

The surprise drop in the Consumer Prices Index from 2.4 per cent in June to 1.9 per cent in July means further interest rate rises are likely to be put on hold.

The Bank's Monetary Policy Committee has pushed up the base rate five times in the past year to 5.75 per cent and hinted that another rise might be needed to bring inflation below the Government's 2 per cent target.

However, it appears to have fallen much more quickly than the committee's experts expected - calling into question the reliability of the economic models used to decide interest rate policy.

City analysts believe that with inflation at 1.9 per cent, the Bank would find it extremely difficult to justify another interest rate rise soon.

A supermarket price war in June is apparently responsible for a large element of the biggest monthly decline in the inflation rate for more than five years.

The Office for National Statistics recorded falls in the price of bread, cereals, meat, fish, fruit and vegetables.

This appears to be at odds with cataclysmic warnings from farmers and food producers that the era of cheap food is at an end.

The figures people are paying on the high street are certainly unusual given increases in wholesale prices for commodity crops such as wheat and corn.

And the evidence from farmers is that a huge proportion of the nation's vegetable crop was wiped out by the recent floods, leading to lower yields and higher prices.

Milk producers have also been warning of a 3p-5p increase in the price of a pint because of a global shortage of dairy products.

Lower power bills and heavy discounting by furniture retailers also contributed to the drop in CPI as stores cut prices to entice shoppers out of the July rain.

The only upward pressure on inflation came from clothing and footwear prices after a reduction in the scale of summer sales compared with last year.

Many analysts believe the CPI underestimates the true scale of inflation faced by consumers.

However, the Retail Prices Index, which is often seen as a more representative measure as it includes mortgage interest payments, also fell from 4.4 per cent in June to 3.8 per cent last month.

City experts suggested the Bank of England would be shocked by the figures. Howard Archer, chief UK economist at Global Insight, said: "This is a massive surprise. Consumer price inflation fell back far more than anyone was expecting in July - including, we strongly suspect, the Bank of England.

"This will undoubtedly take the wind out of the sails of the MPC hawks and will boost expectations that interest rates have peaked at 5.75 per cent.

"Even so it is premature for the Bank of England to relax on the inflation front.

"It is likely that inflation in July was brought down by some summer sales starting early, while recently elevated oil prices and possible future rises in food prices as a result of the bad weather could exert upward pressure on inflation over the next few months."

David Brown, chief European economist at Bear Stearns, added: "The unexpected drop in UK inflation below target to 1.9 per cent takes the wind out of the Bank of England's sails for higher rates and will be a huge fillip to UK markets.

"With consumer prices dropping so sharply in July, it leaves the Bank calling wolf on inflation fears.

"They will have a hard time justifying a further hike in rates especially set against the current troubled financial market backdrop."

Other analysts believe the Bank is hell-bent on pushing up the base rate to 6 per cent, despite the pressure this will heap on millions of people carrying big debts on loans, mortgages and credit cards.