Inflation nears a five-year low

Inflation slid to its lowest level in almost five years during August, official figures showed today.

The Consumer Prices Index (CPI) fell from 1.8 per cent to 1.6 per cent over the month, according to the Office for National Statistics (ONS). It was last lower in November 2004.

Unchanged household energy bills this year compared with big hikes 12 months earlier dragged down the rate of inflation, along with falling food prices, the ONS said.

Wide-ranging price falls for products such as cereals, bread and cakes - helped by a better-than-expected European harvest - helped bring the annual rate of food inflation to 1.9 per cent over the month, which is the lowest for more than three years.

But despite the downward pressure on inflation, the overall CPI measure did not fall as far as the 1.4 per cent forecast by most City commentators.

Many have predicted that Bank of England Governor Mervyn King will soon have to write his first letter to the Chancellor explaining why CPI has undershot the Bank's 2 per cent inflation target by more than 1 per cent.

The smaller-than-expected fall in the CPI was due to soaring petrol prices, with the average litre of petrol rising 1.1p to 103.8p over the month compared with a 5.5p fall 12 months earlier.

The price of second-hand cars also rose at its fastest ever rate for the month, against falling costs a year earlier, in a sign that Britons are tightening their belts due to the recession.

Second-hand car prices rose 2.2 per cent over the month and are now 4.4 per cent higher than a year ago - the highest ever annual increase since ONS records began in 1997.

This was partially offset by air fares on European routes, which saw smaller increases than a year earlier.

The wider Retail Prices Index, which includes housing costs and mortgage interest rates, edged higher to minus 1.3 per cent from minus 1.4 per cent in July.

While food and energy bills also put downward pressure on the RPI, house price rises this year - in contrast to falls in last year's torrid property market - helped to push the measure back towards positive territory during August.