SCOTTISH Chambers of Commerce has declared that an unexpected fall in annual UK inflation should “ease some of the growing pressure” for a rise in UK interest rates.

The fall in inflation, from 2.9 per cent in May to 2.6 per cent in June, wrongfooted the City when it was unveiled yesterday by the Office for National Statistics. It was driven by a drop in motor fuel prices last month, in contrast to a rise at the same time last year.

Economists had forecast annual UK consumer prices index (CPI) inflation, sent surging from only 0.3 per cent in May last year by a plunge in sterling triggered by the Brexit vote the following month, would have remained at 2.9 per cent.

However, economists emphasised the dip in inflation did not change the fact that pay was falling in real terms, with modest increases in wages outstripped by inflation.

Trade union Unite said the fall in inflation was “a cruel illusion for hard-up working people”.

The latest inflation figures show that, overall, food prices in June were 2.6 per cent higher than a year earlier. There were also sharp year-on-year rises in prices for furniture and household goods.

A survey published yesterday by pensions company Aegon UK shows four in five people are now concerned they will no longer be able to maintain their current lifestyle, with 28 per cent redirecting money away from their regular savings to meet the increased cost of living.

Aegon UK declared: “Despite a slight drop in inflation to 2.6 per cent in June, inflation has remained above the Government’s target since February, overtaking wage growth in March, and these price rises are already starting to influence the way people manage their finances.”

Kate Smith, head of pensions at Aegon, said: “Rapidly rising prices are almost always bad news for consumers, particularly pensioners on a fixed income, who are clearly having to go through a bit of belt-tightening at the moment. The problem is amplified by both low wages and low interest rates, which give people little opportunity to grow their savings to meet the growing cost burden.”

Liz Cameron, chief executive of Scottish Chambers of Commerce, said: “June’s fall in inflation is significant, although much of the downward pressure came from a fall in fuel prices this year compared to an increase at the same time last year. Staples such as food and household goods continue to increase [in price] and expectations remain that inflation will continue…above the target rate of two per cent for some time to come.”

However, she added: “Nonetheless, [the fall in inflation] should ease some of the growing pressure from the Bank of England’s Monetary Policy Committee for an early rise in interest rates. The Bank took decisive action to lower rates to rock bottom following last year’s EU referendum result, and businesses welcome the stimulus that this has brought to the economy. Interest rates will eventually have to go back up again, but the risks to our economy of doing so at a time of fragile growth are substantial.”

The MPC cut UK base rates to a fresh record low of 0.25 per cent last August. Three MPC members voted last month to raise rates. They were outvoted by five fellow members who opted for no change.

Howard Archer, chief economic adviser to the EY ITEM Club economic think-tank, said: “While inflation dipping to 2.6 per cent in June offers some relief to consumers, it will still highly likely have been clearly above pay growth, thereby resulting in a further drop in consumers’ real earnings. Latest data show that total weekly average earnings growth was 1.8 per cent [year-on-year] in the three months to May.

“Consumers still look unlikely to see any significant easing in their squeeze before 2018. Inflation will likely be close to three per cent over the coming months and earnings growth looks unlikely to pick up significantly in the near term at least. This does not bode well for consumer spending over the rest of 2017.”

Stephen Martin, director general of the Institute of Directors, said: “[Nominal] annual earnings growth remains sluggish. The recent fall in global oil prices is helping motorists by reducing the cost of motoring. Food inflation, however, is continuing to [move] slowly upward in response to sterling’s collapse. Business finds itself between a rock and a hard place - at risk from a slowdown in consumer demand but not in a position to give inflation-beating pay rises.”

Suren Thiru, head of economics at British Chambers of Commerce, said: “Consumer price growth is likely to resume its upward trend in coming months, with the elevated cost of imported raw materials still filtering through supply chains. Inflation remains a major risk to the UK’s growth prospects.”