It is the third month in a row the Consumer Price Index has dropped but it still remains above the bank of England’s target of 2%.
The Retail Prices Index also slowed to 4.8% from 5% in June.
In his letter to the chancellor of the exchequer explaining why inflation has missed its target Bank of England governor Mervyn King says he expects it to return to target at the end of 2011.
King adds: “The MPC’s assessment is that much of the current high level of inflation can be attributed to the increase in VAT in January 2010, past rises in oil prices and the continued pass-through of higher import prices following the depreciation of sterling since mid-2007. The MPC’s central judgement remains that these effects will prove to have a temporary impact on inflation, and are masking the downward pressure on inflation from spare capacity within companies and the labour market.”
Jeremy Cook, chief economist at World First, says: “Inflation has been consistently ‘sticky’during the downturn and this high reading is by no means a surprise.
The letters between King and Osborne will likely not contain any shocks given the quarterly Inflation Report was only last week. I am still happy with our predictions of an interest rate rise by 0.5% in February as a result.”