UK inflation drops to 1.5%

<p>The annual rate of UK inflation dropped to 1.5 per cent over August.</p>

UK inflation dropped to 1.5 per cent during August as petrol, food and non-alcoholic drink prices all declined over the month.

Figures from the Office for National Statistics (ONS) showed a 0.1 per cent drop in the Consumer Price Index (CPI) inflation during August. The small decline means that the pressure has been eased on the Bank of England to raise interest rates to keep CPI below its target of two per cent.

The issue of interest rates has been much discussed of late. The Bank of England recently announced that it would be holding rates at the record low of 0.5 per cent despite the Monetary Policy Committee (MPC) being split on a decision for the first time since July 2011. Both Ian McCafferty and Martin Weale voted in favour of a 0.25 per cent increase to 0.75 per cent but this was eventually dismissed.

Alongside the drop in CPI there was a reduction in the Retail Price Index inflation which dropped from 2.5 per cent to 2.4 per cent. The key drivers of this decline were the prices of food and non-alcoholic drinks which experienced their biggest fall in over a decade – dropping by 1.1 per cent.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "August's muted consumer price inflation is welcome news for consumers' purchasing power as they currently continue to be hampered by very low earnings growth.

"Indeed, even consumer price inflation of 1.5 per cent in August is still more than double current underlying earnings growth."

Competition between supermarket chains has been highlighted as a key factor in the drop in inflation. The likes of Asda, Tesco and Sainsbury's have all been battling against the rise of grocery stores such as Lidl and Aldi which have been gaining a market share in recent years.

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