High street price cuts and cheaper petrol curb inflation

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Record price-slashing by retailers in the sales season and falling petrol costs helped bring down inflation in June, official figures showed today.

The Consumer Prices Index (CPI) fell from 3.4% to 3.2% over the month, the Office for National Statistics (ONS) said.

Clothing and footwear prices fell by 2.1% - the biggest reduction seen in June since the ONS began collecting monthly figures 14 years ago.

There was also some cheer for motorists as petrol prices fell by an average 2.6p a litre to 117.9p - in contrast with a 4.4p hike a year earlier - dragging down the rate of inflation.

Clothing sales were more widespread this year, particularly for categories such as womenswear, the ONS added.

The impact of petrol and clothing outweighed upward pressures on inflation such as rising air fares - with ticket prices to South Africa doubling for the World Cup - and higher premiums for car and house insurance, statisticians added.

The figures will soothe some concerns among inflation watchers at the Bank of England, although CPI remains well above the Monetary Policy Committee's (MPC) 2% target and has stayed at 3% or higher throughout 2010.

The Bank predicts the CPI will gradually fall back towards target later this year as the economic slack built up by a record recession drags down prices. Factory gate prices from manufacturers fell last month for the first time since November 2008.

The MPC has left monetary policy unchanged since last November, with interest rates at a record low of 0.5% and £200 billion in cash pumped into the economy through quantitative easing.

But arch MPC "hawk" Andrew Sentance made the first call for a rate hike in almost two years during June, arguing that inflation had proved more resistant to recession than expected and that the recovery was strong enough for the emergency support put in place by the MPC to be gradually withdrawn.

The figures also showed a rise in "core" inflation - excluding volatile factors such as food and petrol - over the month from 2.9% to 3.1%

Vicky Redwood, of research consultancy Capital Economics, said the "nightmare scenario" of tax rises accompanied by rising interest rates should be avoided.

She added: "The further fall in headline inflation in June suggests that there is still little pressing need for an interest rate rise. But with core price pressures remaining stubborn, inflation nerves will remain for a while yet."