Rate of inflation falls to 31-month low

The bigger than expected fall is thought to be partly down to record rainfall which forced clothing retailers to bring forward their summer sales.

City analysts had forecast a fall to 2.7 per cent.

The Office for National Statistics (ONS) said the consumer prices index (CPI) rate of inflation was more typical of the June-to-July period, reflecting earlier than average seasonal discounting.

The retail prices index, which includes housing costs, fell from 3.1 to 2.8 per cent.

Inflation has fallen from 5.2 per cent last September as the impact wanes of the VAT hike at the start of 2011. Falling energy, food and commodity prices, and a number of bill cuts from utility providers, have also contributed.

Inflation is now within 0.5 percentage points of the government’s 2 per cent target.

‘Pleasant surprise’

“Inflation has more than halved since September, meaning a little less pressure on family budgets,” said Chloe Smith, the economic secretary to the Treasury. “This lower inflation should support high street spending and growth in the economy in the months to come.”

The drop will also boost the Bank of England’s decision earlier this month to pump more emergency cash into the economy through its quantitative easing programme.

Britain entered a technical recession in the first quarter of 2012 as gross domestic product declined 0.2 per cent, following a 0.3 per cent drop in the final quarter of 2011.

Vicky Redwood, economist at Capital Economics, said the drop in inflation was a “pleasant surprise”.

“Admittedly, this was driven by a sharp drop in clothing inflation, which is probably a temporary result of the poor weather denting clothing sales,” she added.

“Nonetheless, we think that evidence is tentatively building that weak activity and large amounts of spare capacity are bearing down on underlying price pressures.”