ANNUAL UK inflation fell to 2.8% in July, from 2.9% in June, as falls in prices in the clothing and footwear and recreation and culture categories exerted a downward influence, official figures show.
The 2.8% annual UK consumer prices index (CPI) inflation rate for July, unveiled yesterday by the Office for National Statistics, was bang in line with City forecasts.
Howard Archer, chief UK economist at consultancy IHS Global Insight, described the fall in annual inflation as "moderately encouraging". He believed it might help dilute doubts in financial markets over the Bank of England's ability to hold off from raising interest rates until 2016.
Mr Archer said: "Our best bet is consumer price inflation will dip to 2.7% by the end of 2013 and then trend down further to end 2014 just above 2%.
"We expect the Bank of England to keep interest rates at 0.5% through to early 2016, but we believe they could start rising gradually early in 2016."
John McNeill, fixed-income fund manager at Edinburgh-based investment house Kames Capital, said: "CPI inflation is likely to remain above the 2% target for the foreseeable future, but the trend is likely to be slightly down."
Excluding energy, food, alcoholic beverages and tobacco, annual "core" CPI inflation fell from 2.3% in June to 2% in July.
The ONS said prices in the recreation and culture category fell 0.4% overall between June and July, in contrast to a 0.2% rise between the same two months of 2012, exerting downward pressure on the annual CPI inflation rate.
A 3.2% fall in clothing and footwear prices last month was steeper than a corresponding 2.6% drop in July 2012.
The ONS noted the month-on-month fall in clothing and footwear prices in July 2012 had been "unusually small", and cited reports that summer sales had started earlier last year because of poor weather.
Air fares rose by less last month than in July 2012. However, petrol and diesel prices rose by 0.7p and 0.4p-a-litre respectively between June and July, in contrast to falls of 1.2p and 1.6p a year earlier.
Mr Archer said the fall in annual CPI inflation in July eased slightly the squeeze on consumers' purchasing power. But he added that this squeeze remained "appreciable", given annual CPI inflation was running at nearly three times underlying annual average earnings growth of 1% in the three months to May.
Annual UK inflation on the old all-items retail prices index measure fell from 3.3% in June to 3.1% in July.
The Bank of England's Monetary Policy Committee last week committed not to raise base rates from 0.5% at least until the International Labour Organisation measure of unemployment had fallen to a "threshold" of 7%. This commitment would cease to hold if, in the MPC's view, it were more likely than not that annual CPI inflation 18 to 24 months ahead would be 0.5 percentage points or more above the 2% target.
Capital Economics' Martin Beck said: "With policymakers committing last week to keep monetary policy loose at least until the unemployment rate falls to 7%, the inflation 'knockout' surrounding this commitment will influence just how long interest rates stay low for. July's drop in inflation, and the prospect of further falls in the months ahead, should further reduce the chance of this knockout being activated. The rationale for forward guidance just got a bit stronger."
Separate data published yesterday by the ONS showed producers' factory gate prices rose 0.2% month-on-month in July.
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