Inflation drop eases rates pressure

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The Consumer Prices Index (CPI) fell back below the bank's 2% target for the first time in more than a year, dropping from 2.4% in June to 1.9% in July, the Office for National Statistics said.

The decline, which was the biggest monthly fall for more than five years, surprised the City, which had forecast a drop to 2.3%.

The news should see the Bank hold off from hiking rates in September, with some analysts predicting it may now sit tight until November as it monitors the full effects of the five rate rises since August last year.

Howard Archer, UK economist at Global Insight, said: "This is a massive surprise. CPI 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 Monetary Policy Committee hawks and will boost expectations that interest rates have peaked at 5.75%, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates for now at least."

The Retail Prices Index (RPI), which is often seen as a more representative measure of inflation as it includes mortgage interest payments, also fell from 4.4% June to 3.8%.

Falling food prices led the slump in inflation levels after supermarkets implemented a raft of price cuts at the end of June, slashing the cost of meat, vegetables and bread.

However, those reduced prices may only offer a temporary respite with food price inflation expected to pick up over the coming months after the severe flooding in July impacted crops in the UK and as the global wheat crisis continues to put pressure on animal feeds and cereal prices.

Additionally, average petrol prices dipped by 0.3p a litre during July, but steep rises in cost of oil at the end of the month could see this effect reversed later this month.