A rare ray of hope on the UK inflation horizon emerged yesterday, when official data revealed producers' material and fuel costs fell unexpectedly in July for the first time since last August.

A rare ray of hope on the UK inflation horizon emerged yesterday, when official data revealed producers' material and fuel costs fell unexpectedly in July for the first time since last August - dropping at the fastest pace for one and a half years.

However, highlighting a near-term outlook in which inflation will remain a dark cloud likely to prevent the Bank of England from cutting interest rates any time soon, producers' own factory-gate prices rose at a record annual pace again last month.

The Office for National Statistics (ONS) said yesterday that UK producers' input prices, comprising their material and fuel costs, fell by a seasonally-adjusted 0.6% between June and July. The City had expected a month-on-month rise of 1.0%, and the 0.6% fall was the biggest drop since January 2007.

This cooled the annual rate of increase of input prices from 30.8% in June to an albeit still heady 30.1% in July.

Producers' crude oil-related costs rose by 1.4% month-on-month, but fuel showed a 1.7% fall. Also on the inputs side, the cost of both home-produced and imported food materials dipped 0.2% between June and July.

In contrast, annual growth of factory-gate prices accelerated from 10.0% in June to 10.2% in July, the highest since comparable records began in 1986, with an unadjusted 0.4% month-on-month rise. The rise in factory-gate prices during July was only slightly less than the 0.5% forecast by the City.

Paul Dales, UK economist at consultancy Capital Economics in London, said of yesterday's producer prices data: "While pipeline price pressures in the UK economy remain very strong, there is some tentative evidence that they may be close to a peak.

"Producers are clearly raising their selling prices at rates much faster than those consistent with the 2% CPI (annual consumer prices index) inflation target in the long run. However, there was some evidence that the relentless rise in cost pressures seen over the last year may be coming to an end. For the first time (since August 2007), producers' raw material costs fell in July."

Dales noted that producers' raw material costs "are still rising at incredibly rapid rates" and pointed out that separate UK trade data yesterday from the ONS showed "import price inflation rose from 14.5% in May to a record high of 15.6%" in June.

However, he added: "The sharp falls in oil, gas and wholesale food prices seen in recent weeks suggest that price pressures right at the start of the inflation pipeline may be close to a peak.

"So, while the MPC will remain on guard for signs that the sharp rises in pipeline price pressures seen over the last year are feeding through into inflation on the high street for some months yet, there does at last seem to be some light emerging at the end of the inflation tunnel."

Howard Archer, chief UK economist at consultancy Global Insight, said: "The best news was that producer input prices unexpectedly retreated by 0.6% month-on-month in July even though oil prices hit a record high early in the month (when US light crude moved above $147 a barrel). The sharp retreat in oil and commodity prices later on in the month clearly started to feed through in the overall July input data and it should show up far more in the August data. It seems therefore that the year-on-year rise in input prices peaked at 30.8% in June."

Archer said this fall in input costs during July, coupled with the "equal-smallest rise in factory-gate prices last month since August 2007, provided "some very modest relief on the inflation front".

Excluding food, drink, tobacco and petroleum, core factory-gate price inflation accelerated from an upwardly-revised 6.5% in June to 6.6% in July on a seasonally-adjusted basis and stood still at 6.7% on an unadjusted basis. Neither of these measures of annual core output inflation has been higher since May 1981.

Noting overall annual factory-gate price inflation of 10.2% in July and the jump in the core measure from 6.5% to 6.6%, Archer declared: "This is hardly a cause for celebration."

The Bank of England's Monetary Policy Committee has been extremely aware of manufacturers' continuing pricing power, which has so far defied the very sharp economic slowdown, as it has deliberated over interest rates.

Archer considered that the recent sharp retreat in the prices of oil and other commodities should ease the pressure on manufacturers to raise what they are charging customers.

Benchmark US light crude was last night trading around $113, down nearly $2 on the session.

This week will see a barrage of news on the inflation front.

The ONS will today publish consumer price inflation data for July. This is expected to show an acceleration in annual UK CPI inflation from 3.8% in June to 4.1% in July, which would be more than double the 2% target set for the Bank of England by the Treasury.

The Bank of England will publish its latest quarterly growth and inflation projections tomorrow.

The MPC has held UK base rates at 5%, since cutting them in three, quarter-point stages between December and April.

Archer said: "The Bank of England will probably be modestly relieved overall with the July producer price inflation data, but it is very far from out of the inflation woods yet, with consumer price inflation still likely to near 5% later this year. Consequently, we still suspect that the Bank of England will be reluctant to cut interest rates until early 2009 despite the fact that the economy now seems more likely than not to contract over the second half of this year.

"However, an interest-rate cut in November could conceivably occur and we expect interest rates to come down markedly to 4.25% by mid-2009 and to 3.75% in the second half (of next year)."