Inflation falls on food price war

A supermarket price war helped the UK’s rate of inflation to fall to 1.9% in July, far below analysts’ forecasts.

The CPI (Consumer Price Index) dropped from June’s level of 2.4%, raising hopes that further rises in interest rates will not be necessary.

It is the first time UK inflation has fallen below the government’s target of 2% since March 2006.

The Retail Price Index, a measure often used in wage bargaining, fell to 3.8% in July from 4.4% the previous month.

“This is a massive surprise,” said Howard Archer, chief UK and European economist at Global Insight.

“Consumer price inflation fell back far more than anyone was expecting in July, including, we strongly suspect, the Bank of England.

“This 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 news caused the pound to fall below the $2 level for the first time for some time.

Speculators considered the possibility that the Bank of England would reconsider raising interest rates one more time to rein in inflation, as it had previously suggested it might.

Higher interest rates give currency investors better income and vice versa. At 0840 GMT, one pound traded at $1.999, down from $2.008 before the data was released.