Surprise fall in UK inflation

UK inflation unexpectedly fell in June, largely because of cheaper foreign holidays.

The underlying rate, which excludes mortgage interest payments, fell to 2.8% from 2.9% in May.

This keeps inflation above the government's 2.5% target.

The falls give extra justification to the Bank of England's decision to cut interest rates last week to a 48-year low of 3.5%.

'Better than expected'

The harmonised inflation rate, which the government plans to target from November, fell to just 1.1%, according to the Office for National Statistics.

There is widespread speculation that the eventual target for that rate will be 2%.

Adam Chester, an economist at the Halifax bank, said the figures were "better than expected".

He said the Bank of England's Monetary Policy Committee (MPC) may have seen the inflation report last week, before it decided to cut interest rates.

"This is in line with the MPC's view that inflation will moderate in the medium term.

"On balance, there's a possibility that if inflation remains this weak in coming months, the MPC could cut rates again," he added.

'Strong impact'

Peter Dixon, an economist at Commerzbank, said: "Clearly inflation is going back toward the 2.5% target.

"I suspect that recent unwinding of sterling depreciation is going to put more downward pressure on inflation.

"We could well be back toward the target rate by the end of year.

"I don't think this will have strong impact on UK interest rate outlook.

"The central bank is concentrating more on growth than inflation at the moment."