Inflation drops to 3.1%

UK inflation has dropped to 3.1% from 3.2% in June, according to the Office for National Statistics’ (ONS) July figures.

This is the third consecutive month that price increases have slowed, however the consumer price index (CPI) is still well above the 2% target rate set by the Bank of England.

The British Chambers of Commerce (BCC) has responded by warning of the dangers of raising interest rates in reaction to the stubborn inflation figures.

The lobby group’s chief economist, David Kern, said: “Headline CPI inflation fell slightly in July, which was in line with expectations, but it remains stubbornly high. Nevertheless, it would be wrong to overreact to these figures by raising interest rates or withdrawing the support provided by quantitative easing.

“While the Monetary Policy Committee cannot ignore the risk that inflationary expectations might worsen, there is no sign of this happening at present.”

The ONS said that the main factors responsible for the decline in inflation were the price of clothing and footwear, which fell by 4.9%.

The latest figures come after the Bank of England warned last week that the impact of the VAT rise to 20%, aimed at reducing the deficit, would keep inflation above next year’s target.

© Crimson Business Ltd. 2010