Page last updated at 10:11 GMT, Tuesday, 14 July 2009 11:11 UK

UK inflation dips to 1.8% in June

Shoppers on High Street
CPI is below the government's 2% target

A key measure of inflation has fallen below the Bank of England's target rate of 2% for the first time since 2007.

Lower food prices caused the Consumer Prices Index (CPI) to drop to an annual rate of 1.8% in June from 2.2% in May, official statistics showed.

The Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments and housing costs, also fell, to -1.6% from -1.1%.

The RPI is now at its lowest since ONS records started in 1948.

The Bank of England aims to keep inflation at 2% to maintain price stability and more broadly, economic stability.

Consensus

Lower prices for meat, milk and fruit last month were the main reason for the fall in inflation.

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"A significant downward effect also came from furniture prices, which rose by less than last year," the Office for National Statistics said.

It also pointed to a large upward pressure on the CPI rate from the recreation and culture sector, with computer games in particular rising by more than a year ago.

The CPI is far below what it was last September, when the rate hit 5.2% because of high oil and food prices.

The Bank of England is now predicting CPI will fall below 1% this year, as the downturn hits demand and sends prices lower.

"The figures are bang on consensus," said economist Philip Shaw of Investec.

We could still see falling prices on the CPI measure in the next year... but that's not what most forecasters expect
Stephanie Flanders, BBC economics editor

"We note that food prices fell back on the month and the increase in petrol prices was a little less than we'd factored in."

He added that the RPI measure was negative because of "aggressive" cuts in interest rates since last autumn.

Interest rates are now at a record low of 0.5%.

"To call this a period of deflation would be totally wrong," he said

But not everyone agreed.

David Kern, head economist at the British Chambers of Commerce said: "The figures confirm the BCC's assessment that in the short-term, the main policy priority must be countering the risks posed by recession and deflation".

In the near future the BCC is urging the Bank of England to expand the scale of quantitative easing well beyond £125bn.

Having lowered interest rates sharply the government has aimed to increase the amount of money circulating to boost the economy, though quantitative easing.

Stephen Bell, of hedge fund GLC, said: "Underlying inflation will remain low for some time, which is good news for home [loan] borrowers."

While it will be a "long hard struggle to recovery" he said the positive message was that the UK economy was recovering faster than other economies.



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