UK inflation rate falls to 1.6%

A key measure of inflation has fallen to its lowest level since February 2005, official statistics show.

The Consumer Prices Index (CPI) dropped to an annual rate of 1.6% in August from 1.8% in July.

But the Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, rose, to -1.3% from -1.4%.

The Bank of England aims to maintain inflation at 2% to keep both prices and the broader economy stable.

On Tuesday, Mr King told the Treasury Select Committee that inflation was “likely to be volatile” over the next six months, initially falling further below the 2% target, then rising above it.

“That volatility reflects base effects as well as the reversal of last year’s VAT cut,” he said.

Cheaper food

Lower food costs contributed to the fall in consumer price inflation, with the price of fruit, vegetables, bread and meat all decreasing, said the Office for National Statistics (ONS).

Gas and electricity prices remained little changed, but transport costs went up, thanks to a rise in the average price of petrol.

British Chambers of Commerce chief economist David Kern said the August inflation figures were “slightly higher than expected”.

But he added: “The figures do not alter the basic fact that signs of recovery remain fragile, and the main policy priority is to avoid a setback.”

Mr Kern called on the Bank’s Monetary Policy Committee to increase its quantitative easing programme to £200bn.

He said it should also consider imposing a negative interest rate on deposits held by banks at the Bank of England.

Vicky Redwood, economist at Capital Economics, said that despite the prospect of higher inflation next year, “the big picture is still that inflation is set to fall to very low levels next year and beyond – with a prolonged period of deflation still the main risk.”