Factory gate inflation slowed more than expected in August and firms' raw material costs dropped at their sharpest monthly rate in 1-1/2 years, official data showed on Monday.

The Office for National Statistics said output prices were unchanged on the month in August, bringing the annual rate of increase down to 2.6 percent from 2.9 percent. Analysts had predicted a 2.7 percent rate.

Core output prices defied expectations of a rise and fell a seasonally adjusted 0.2 percent, the biggest drop since December 2004. They were up 2.0 percent on the year.

A fall in the cost of crude oil from elevated levels also helped push input prices lower at their sharpest rate since December 2004. The ONS said they fell a seasonally adjusted 1.2 percent on the month for an annual increase of 7.5 percent.

Sterling fell nearly half a cent as the figures eased concern about rising price pressures as firms try and recoup soaring fuel prices.

At the margin, they reduce the likelihood that the Monetary Policy Committee will have to act again on its implied tightening bias, said Michael Every, strategist at RBC Capital Markets.

Most analysts expect another increase in interest rates before the end of the year as the Bank of England tries to keep inflation down. Data on consumer prices will be out on Tuesday.

Separately, the ONS released data on trade. The global goods trade deficit was largely as expected but the non-EU posted a record high.

But the figures continue to be distorted by VAT fraud making them volatile and they are seen as an unreliable indicator of what is actually happening in the economy.