Page last updated at 12:56 GMT, Tuesday, 18 August 2009 13:56 UK

UK inflation rate stays at 1.8%

Shoppers on High Street
Retail prices have fallen to a record low over the past year.

A key measure of inflation in the UK has unexpectedly remained at 1.8%.

Economists had expected the Consumer Prices Index (CPI) to decline to 1.5% in July.

The Retail Prices Index (RPI) inflation measure, which includes mortgage interest payments, also unexpectedly rose to -1.4%, from -1.6%.

The RPI rate has fallen sharply over the past year as the Bank of England slashed interest rates to a record low amid a recession.

The figures suggest that deflationary pressures on the economy may be easing.

Train fares

The RPI rate had fallen in June to its lowest since the records started in 1948, according to the ONS.

Inflation calculator

Among other things, the RPI should mean lower season ticket prices for trains next year.

Annual rail fare rises are pegged to the RPI figure in July of the prior year, plus an average of 1%.

So a £2,000 season ticket would fall by £8, based on an expected cut in prices of 0.4%.

Last July, the RPI was 5%, meaning that rail prices this year rose by 6%.

'Coming through'

Prices of recreational devices, such as computer games, DVDs and CDs, rose the most in the month, according to the Office for National Statistics (ONS).

There was also upward pressure from furniture prices because of less aggressive discounting in the July sales.

We expect that this halt in the downward trend in inflation will prove to be only temporary
Vicky Redwood, Capital Economics

The chief downward impact on prices came from food and non-alcoholic drink prices.

"I think you're still to see the full effects of reduce gas and electricity prices," Chancellor Alistair Darling told the BBC.

"If you look at all the numbers we've seen of the past few months, they are consistent with an economy that's coming through a pretty severe downturn."

Below target

The drop to 1.8% in June was the first time in two years that CPI rate - the government's preferred measure of inflation - fell below the Bank of England's 2% target rate.

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

Earlier this month, the Bank said it was "more likely than not" that the annual rate of growth in consumer prices would temporarily fall below 1% in the autumn and stay low until the end of its two-year forecast period.

"With the amount of spare capacity in the economy still building, core price pressures should soon start to ease," said Vicky Redwood, an economist at Capital Economics.

"Accordingly, we expect that this halt in the downward trend in inflation will prove to be only temporary.

"Indeed, these figures do little to alter our view that a prolonged period of low inflation or even deflation remains a serious risk," she added.

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