Inflation rate remains above target

Britain's annual inflation rate eased slightly in July, but remained well above the Bank of England's 2% target, official figures showed today.

The Office for National Statistics said consumer prices fell by 0.1% last month, bringing the consumer prices index (CPI) down to 2.4% from 2.5% in June - its highest level since 1997.

The largest downward effect came from household equipment and routine maintenance, due to special offers in July for furniture, the ONS said.

Other factors pushing down the inflation rate came from financial services, where increases seen a year ago were not repeated in July. Air fares and petrol prices also rose by less than last year.

The Bank of England's monetary policy committee (MPC) this month surprised many analysts by raising interest rates by a quarter-point to 4.75%, its first rate increase in two years.

When the MPC raised rates, Bank officials said the move was necessary to keep inflation on track against a background of firm growth and limited spare capacity, with inflation likely to remain above target for some time. In its quarterly inflation report last week, the MPC said inflation could rise up to around 2.7% this year because of higher utility bills and university tuition fees.

Mervyn King, the Bank's governor, went so far as to say that there was a 50-50 chance inflation could climb more than 1% above the Bank's 2% target. Under its remit, the Bank has to write a letter of explanation to the Treasury, if inflation moves more than one percentage point either side of its target.

The Bank's big worry is the impact of higher energy prices. It is concerned that the rise in petrol prices and utility bills could lead to increased pay claims - so-called "second-round effects" of soaring energy prices.

"With hikes in utility prices and increasing university tuition fees set to push headline inflation higher over the coming months, and given its concerns about the amount of spare capacity in the economy, the Bank of England is unlikely to relax," said Howard Archer, of the consultancy, Global Insight.

Most analysts think that the Bank will raise rates again before the end of the year, possibly in November.