Cheaper food takes inflation below target

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Inflation fell below the Bank of England's 2 per cent target for the first time in almost two years in June, official figures showed today.

The Consumer Prices Index (CPI) slid from 2.2 per cent to 1.8 per cent in June, the Office for National Statistics (ONS) said - the lowest since September 2007.

Falling food prices in June - particularly for meat, milk and fruit - were the main factor behind the fall, compared with a year earlier when food costs were rising sharply.

CPI was also dragged down by a lower increase in furniture prices than seen last year.

Average petrol costs in June also rose 4.4p to 101.6p a litre, although this was lower than the 5.3p jump seen a year earlier when oil prices were heading towards a record 147 dollars a barrel.

Meanwhile, mortgage arrangement fees fell this year compared with rises a year ago and insurance costs also fell more quickly than 12 months earlier, despite an upward effect from dearer computer games.

Inflation-watchers on the Bank of England's Monetary Policy Committee (MPC) will be relieved that CPI is now below target after an 18-month period in which rocketing energy bills, food costs and petrol prices pushed the benchmark to a record 5.2 per cent last September.

But according to its own predictions, CPI is likely to fall below 1 per cent later this year as the impact of recession weakens demand and prices.

This means Bank Governor Mervyn King is likely to have to write a first letter to the Chancellor to explain why CPI is undershooting the 2 per cent target.

Today's figures also showed the wider Retail Prices Index, which includes housing costs such as mortgage interest payments and council tax, falling to minus 1.6 per cent. This is the lowest level since ONS records began in 1948.

RPI was affected by the same factors which has dragged the CPI lower in June, but is negative due to lower mortgage interest payments than a year ago. Interest rates are currently at a record low of 0.5 per cent, compared with 5 per cent a year earlier.

RPI will fall further until September but after that point will head back towards positive territory, because of the contrast with emergency rate cuts which began last October in the wake of the financial crisis. Rate cuts are unlikely this year, which will add to inflationary effects.