Fashion sales and fierce competition among supermarkets helped keep the lid on food prices for the longest stretch in a decade.
The drop in the Consumer Price Index(CPI) measure from 1.9 per cent in June caused the pound to fall by a cent against both the dollar and the euro.
The latest numbers mean inflation has been below the Bank of England's 2 per cent target for seven months in a row; the first time this has happened since 2005.
Prime Minister David Cameron said: "Good news inflation is down to 1.6 per cent. We have to stick to our long-term economic plan to ensure financial security for families," while the Chancellor tweeted: "Welcome news for family budgets that inflation has fallen to just 1.6 per cent." But Cathy Jamieson, the Shadow Treasury Minister, said: "While this fall in the rate of inflation is welcome, the squeeze on working people continues." Wages are still struggling with latest figures showing a 0.2 per cent fall. The Bank of England recently halved its forecast for 2014 pay growth from 2.5 per cent to 1.25.
The largest contribution to the fall in CPI came from clothing and footwear, where prices fell 5.7 per cent month-on-month or 0.2 per cent year-on-year. Food and non-alcoholic beverages fell 0.4 per cent year-on-year after no change in June and a 0.6 per cent drop in May. May's decline was the first since March 2006.
Last week the Bank pushed back City forecasts for the timing of an interest rate rise.