Further fall in inflation expected

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The Consumer Prices Index (CPI) was 1.6% in August, according to the Office for National Statistics (ONS), and analysts predict a further fall last month, to 1.2% or 1.3%.

This would be the lowest level since October 2004, when the measure was at 1.2%.

Fears that CPI would fall below 1% - forcing the Bank of England to write an open letter explaining why inflation had undershot the 2% target - have receded.

While steep gas and electricity price hikes a year ago compared to no change this time create deflationary pressure, CPI has remained higher due to other factors such as a weak pound and an increase in fuel duty.

Samuel Tombs, of Capital Economics, has predicted CPI will drop to 1.2%.

He said: "The decline will probably be driven by a sharp drop in utility price inflation and, to a lesser extent, food price inflation.

"We expect headline inflation to start rising later this year, as petrol price inflation picks up and the temporary VAT cut is reversed."

Philip Shaw, of Investec Securities, predicts the rate will have fallen to 1.3% in September, but said the month could mark a low point for CPI. He said this could have implications for the Bank's £175 billion quantitative easing (QE) programme aimed at boosting the money supply.

"In August, Governor King forecast inflation falling 'quickly' with the chances of it dropping below 1% as 'more likely than not'. If this no longer looks likely, we wonder how keenly certain MPC members would pursue additional QE," he said.