Inflation drop takes pressure off interest rates
Drop in fruit and veg prices lead to a sharp decline in monthly inflation, raising hopes interest rates have peaked
UK inflation fell below the Bank of England's 2 per cent target for the first time in more than a year, raising a question mark over whether the interest rate will be increased to reach 6 per cent.
The Office for National Statistics said that inflation had fallen from 2.4 per cent in June to 1.9 per cent during July, helped by a 0.6 per cent decline in consumer prices.
Last week the Bank signalled in its quarterly Inflation Report that the interest rate could rise again, from 5.75 per cent to 6 per cent, to pull inflation into line with its 2 per cent target. The Bank has increased borrowing costs five times since last August.
Howard Archer, of Global Insight, said: "This will undoubtedly take the wind out of the sails of the MPC [Monetary Policy Committee] hawks, and will boost expectations that interest rates have peaked at 5.75 per cent, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates for now at least."
The July inflation rate is the lowest since March last year, when figures fell below the 2 per cent target.
The biggest impact on inflation last month came from food and non-alcoholic drinks, which reduced inflation by 0.2 per cent, caused by increasing price competition among supermarkets.
The poor weather in June and July has also helped to bring down inflation as furniture and furnishing retailers have been forced to bring forward sales to clear stock. In July, furniture prices fell by 10 per cent following record increases in June.
The ONS said that lower petrol prices also contributed to July's inflation rate, falling by 0.3p per litre compared to a rise of nearly 2p in the same month last year while energy bills are continuing to shrink.
Retail price inflation also declined more than expected, from 4.4 per cent to 3.8 per cent in July, the lowest since October 2006 and below the analysts' forecast of 4.3 per cent.
(Published by Times Online, August 14, 2007)
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