The fall in inflation last month surprised the City, where a small increase was expected. Confidence that the long- term outlook for inflation was improving saw yields on ultra-long-dated government securities dip below 8 per cent.
Inflation was last lower at 0.8 per cent in July 1963.
The Government's preferred measure of underlying inflation, which excludes mortgage interest payments, also confounded forecasts of an increase, remaining at May's rate of 2.8 per cent, safely below the Treasury's short-term target ceiling of 4 per cent.
Clothes prices fell nearly 1 per cent in June, the sharpest drop for the time of year since 1952, as many retailers brought forward summer price reductions by a month. Early sale offers on furniture, furnishings and electrical appliances produced the biggest June fall in household goods prices since records began.
A fall of 4.6 per cent in seasonal food prices, especially those for fresh vegetables, also helped to reduce the retail price index during the month. But there was upward pressure on the inflation rate as a small fall in mortgage rates a year ago dropped out of the annual comparison.
Underlying inflationary pressures in the economy remain subdued as lower wage costs offset the boost to import prices from the pound's devaluation. Higher costs are also being absorbed in firms' profits rather than passed on in prices.
Kenneth Clarke, the Chancellor, welcomed the figures. 'We have got now down to a very good inflation level and it is vital to our future prosperity that we keep ourselves competitive and keep inflation down,' he said. He added that economic recovery appeared to be strengthening a bit.
Roger Bootle, chief economist at Midland Global Markets, said he expected the headline inflation rate to creep up to just under 2 per cent by the year-end. He added that interest rates were still likely to be cut again to accompany extra tax increases in November, perhaps to as low as 3 per cent.
The rise in gilts prices in response to the figures allowed the Bank of England to issue a further pounds 1bn in tap stocks, helping to fund the Government's borrowing requirement.
The pound rose 1.84 pfennigs to a 10-month high of DM2.5783, also benefiting from its 'safe haven' status from tensions in the European exchange rate mechanism.
It also rose 0.75 cents to dollars 1.5010. Against a basket of currencies, sterling rose half a point to a five- week high of 81.7 per cent of its 1985 value.
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