RTTNews - UK annual inflation stayed below the central bank's 2% target for the second straight month in July.

According to a report released by the Office for National Statistics on Tuesday, annual inflation unexpectedly stood at 1.8% in July, the same as in June, which was the lowest since September 2007. Economists had expected the annual rate to ease to 1.5%. Month-on-month, the consumer price index remained flat, while economists were looking for a 0.3% fall.

The largest downward contribution to the change in the annual rate came from food and non-alcoholic beverages. Restaurants and hotels also had a large downward effect. In contrast, the largest upward contribution came from recreation and culture. The ONS cited the increases in the costs of computer games and DVDs as factors putting upward pressure on prices.

Meanwhile, core annual inflation that excludes energy, food, alcohol and tobacco was 1.8% in July versus 1.6% in June. The annual rate was the highest since November 2008. The increase in the core inflation rate was unexpected as economists were looking for a lower rate of 1.5%.

Further, the ONS report showed that retail prices declined 1.4% in July from the prior year, which was slower than the expected fall of 1.7% and June's 1.6% drop. Retail prices also stayed flat on a monthly basis, while consensus forecast was for a 0.2% fall.

The main factors affecting the CPI also affected the RPI. The largest upward contribution to the change in the RPI annual rate came from motoring expenditure mainly due to purchase of motor vehicles.

Excluding mortgage interest payments, retail prices were up 1.2% annually in July compared to the 1% increase in June. Economists were expecting the index to rise 1% in July also.

Commenting on the data, Commerzbank analyst Peter Dixon said the CPI inflation would fall below 1% in the fourth quarter, but the trough might well not be quite as low as previously estimated by the Commerzbank. The lagged effect of weakness in sterling last year is one factor which is helping to put pressure on prices, but this ought to play less of a role in future.

However, the Commerzbank continues to look for the CPI inflation rate to hover close to, and at times above the BoE's central 2% target next year, as the temporary reduction in VAT is reversed. But inflation is not an issue figuring in the monetary policy calculations of the central bank right now. It is not likely to be a factor at any time in the foreseeable future.

The Bank of England in its quarterly Inflation Report revealed that the CPI inflation is likely to drop further below its target in the coming months. The central bank added that inflation is more likely to fall below 1% in autumn, requiring an open letter from the Governor to the Chancellor.

On August 6, the BoE had decided to hold its key interest rate at an all time low of 0.5% and to raise the size of quantitative easing measures by GBP 50 billion to GBP 175 billion.

Elsewhere, the Department for Transport said, citing the ONS report, that most regulated rail fares will fall by January 2010. Increase in most of the rail journey fares are capped at RPI plus 1%. Majority of rail journey fares are regulated by the government.

The government also removed the flexibility for operators to increase individual regulated fares by up to 5% above the national fare change.

Transport Secretary Andrew Adonis said, Today's RPI figure of -1.4% means that the majority of regulated rail fares, including most commuter fares, will fall in January.

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