Rate of inflation sinks back to 25-year record low

Inflation tumbled to a record low as last month's petrol price war between the major retailers drove down the cost of fuel.

Inflation tumbled to a record low as last month's petrol price war between the major retailers drove down the cost of fuel.

Underlying inflation, the measure targeted by the Bank of England, fell to 1.9 per cent in August from 2.2 per cent in the previous month. This was much weaker than expected and matches April's figure as the lowest since records began in 1975. The headline rate, which is used in pay bargaining, also fell sharply - to 3.0 per cent from 3.3 per cent.

The benign data boosted hopes that interest rates will stay on hold next month, briefly pushing sterling below $1.40 for the first time in 14 years. The pound later strengthened to close in London at $1.4058.

Economists highlighted the irony of a fall in petrol prices being published as the nation was gripped by protests over the rising cost of fuel and by widespread petrol shortages.

The price of a litre of unleaded fell 4p to 81p last month, a drop of 5 per cent. The impact was magnified by a strong rise in petrol prices a year earlier.

Richard Iley, UK economist of ABN Amro in London, said that August's falls would prove short-lived as petrol prices had surged 7 per cent over the past week. "The risks to the inflationary outlook remain on the upside," he said, adding that interest rates would rise in October or November.

Michael Derks, at Commonwealth Bank of Australia, said falling inflation meant that the Bank was right to leave rates on hold. "It also ensures rates are likely to remain on hold throughout the rest of the year," he said.

Business groups welcomed the figures. Ian Fletcher, chief economist at the British Chambers of Commerce, said: "The reasons for raising interest rates subside by the day."

Eddie George, the Governor of the Bank of England, said that he was not overly concerned by the weakness of sterling against the dollar. "I think it is wrong to look at bilateral exchange rates," he told reporters in Switzerland. "The dollar is strong because of the remarkable performance of the US economy."

The internationally recognised harmonised index of consumer prices showed an annual inflation rate of just 0.6 per cent, easily the lowest in the European Union.