Rate of inflation below target

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The cost of living rose by its slowest rate for more than a year in August, with the Consumer Prices Index dropping to 1.8% from 1.9% in July, according to the Office for National Statistics (ONS).

The official measure of inflation - the Consumer Prices Index - was last 1.8% in March last year, said the ONS.

But the Retail Prices Index (RPI), which is often seen as the more representative measure of inflation as it includes mortgage costs, rose to 4.1% last month from 3.8% in July.

The increase was the largest monthly rise since February last year.

The ONS said RPI hit 4.1% largely as a result of mortgage lenders passing on the July quarter-point increase in interest rates to borrowers.

The headline inflation figure is likely to reinforce views that interest rates may now have peaked at 5.75%.

Bank of England governor Mervyn King signalled in a speech last week that interest rates would be held until the current turmoil in financial markets passes.

The further drop in inflation, which comes after July's surprise fall to 1.9%, may also fuel expectations that the next interest rate move by the Bank could be a cut as the global credit crunch threatens the wider economy.

The ONS figures revealed that CPI was kept below the Government's 2% target thanks to low new-season clothing price rises, alongside the impact of recent energy price cuts, which continue to filter through after suppliers trimmed costs earlier this year.