Inflation unexpectedly eased last month, reducing the chance of an interest-rate rise this year.
Consumer price inflation (CPI) fell 0.1 per cent from the previous month, the first June decline since 2003, as retailers cut the prices of electronics such as computer games, toys and other leisure items. Clothes and footwear prices also dropped as the summer sales started early.
The declines in leisure goods offset further rises in the cost of food and took the annual inflation rate to 4.2 per cent, the Office of National Statistics said. Economists had expected the annual rate to remain at 4.5 per cent.
Core inflation, which leaves out volatile energy and food prices, slowed to 2.8 per cent, its lowest since last November, from 3.3 per cent in May.
Inflation has been above the Bank of England's 2 per cent target for 18 months but the central bank has kept interest rates at their all-time low of 0.5 per cent in an attempt to keep the UK's weakened economy afloat. Consumers are grappling with tax rises, increased prices for essential items, public-sector job cuts and economic uncertainty.
Jonathan Loynes, an economist at Capital Economics, said: "This might be the first real sign that the weakness of households' spending power is starting to bear down on underlying price pressures in the high street."
Sterling plunged to a low against the dollar not seen since late January as investors cut bets on a near-term rise in interest rates. Earlier this year, a rate rise was seen as a certainty but investors now do not expect a hike until late next year.
The Bank's Governor, Sir Mervyn King, said on Monday that increasing rates would have been a mistake because it would have slowed growth and increased unemployment. He has argued that most of the inflation has come from rising energy and food costs, which are out of the Bank's control and have not fed through to wage demands.
George Buckley, an economist at Deutsche Bank, said CPI was still likely to rise above 5 per cent in September on rising food costs before easing later in the year.
There was further news to damp expectations of a rate rise as Britain's trade deficit with the rest of the world widened unexpectedly in May to £8.5bn as imports surged.
Mr Buckley also said: "Net trade contributed positively to GDP in the first quarter but this looks unlikely in Q2 now. While exports have been growing at nearly twice the annual rate of imports over the past three months, that looks set to change over the summer."
Charlie Bean, the Bank of England's deputy governor, argued yesterday that interest rates should be used for controlling inflation rather than curbing asset bubbles.
The Bank has faced criticism for not increasing rates sharply to tame the housing market during the boom but he said that would not have prevented the crisis.
"The terms of trade for controlling the risks to financial stability through monetary policy alone do not look very favourable," he said in a speech.
More interventionist "macroprudential" measures such as increasing banks' capital buffers would be more effective, he said.Reuse content