17 August 2010 Last updated at 07:33 ET

UK inflation rate slows again in July

Summer sales helped to push down prices, analysts said

UK inflation eased to 3.1% in July from 3.2% in June, the third month in a row that prices have risen more slowly.

However, the Consumer Prices Index (CPI) is still well above the Bank of England's 2% target rate.

The Retail Prices Index (RPI) slowed to 4.8% from 5% in June, the Office for National Statistics (ONS) said.

The governor of the Bank of England has written to the chancellor of the exchequer explaining why inflation is still above target.

In his letter, Mervyn King said that although the Bank's Monetary Policy Committee (MPC) had been "surprised" by the recent strength of inflation, this was largely due to "temporary" factors.

These included the return of VAT in January to 17.5% following the reduction to 15% during the recession, past rises in oil prices and higher import prices as a result of the depreciation in the pound since the middle of 2007.

However, he said "there remains a significant probability that I will need to write further open letters to you in the coming months".

Last week, the Bank said it expected inflation to remain higher than forecast in the coming months, largely because of the rise in VAT to 20% in January next year.

However, Mr King said inflation was likely to fall back below the Bank's 2% target in 2012.

In response to the governor's letter, Chancellor George Osborne said there were "significant uncertainties about the inflation outlook".

He also noted that the Office for Budget Responsibility, the independent body set up by the coalition government to assess the public finances and the economy, also foreasts that inflation will fall below 2% in early 2012.

Food prices

The July inflation figures are watched particularly closely, as they are used to set rail fare increases for the following year.

The changes affect regulated rail fares, which include long-distance off-peak journeys. This comes after some fares fell at the start of 2010, because RPI last July was -1.4%.

The main factor behind the drop in the inflation rate was a fall in transport costs, and in particular the prices of second-hand cars and fuel.

Other factors included falls in the price of clothing and footwear.

Analysis

Nils Blythe BBC business correspondent

---

Many people are getting a little worse off each month.

The wide measure of the cost of living - which includes housing costs - is the Retail Prices Index. It rose by 4.8% in the year to July - 5% in the year to June 2010.

But, according to the Office for National Statistics, average earnings in the year to June rose by only 1.3%. So most people in work have less spending power now than they did a year ago.

And this fall in what economists call "real incomes" - earnings after taking account of inflation - looks set to continue.

Inflation is likely to remain high throughout 2011 and recent wage settlements suggest that many employees will see a further fall in real incomes next year.

These offset rises in cost of food and non-alcoholic drinks. For example, wheat prices hit a 22-month high earlier this month after rising more than 50% since the end of June.

Core inflation - which ignores volatile energy and food prices and is closely watched by economists - fell to 2.6% from 3.1%.

"The numbers are broadly as expected, with some easing in the core inflation, which I think will probably please some members of the [Bank's] MPC," said Stephen Lewis at Monument Securities.

"But whether we are going to hold on to this better position does remain doubtful because there could be some unwinding of seasonal discounts as we move further into the autumn."

Spending mix

Separately, a BBC freedom of information request has shown which products were considered for inclusion in the inflation indexes when they were reviewed in March. Only products that reflect the spending habits of the UK consumer are included.

The products that were considered but did not make it included tattoos, ear piercings, iPhone applications, eyebrow waxings and herbal tea bags.

DVD players, Freeview boxes and cigarette vending machines were considered for exclusion, but were left in.

In March, the ONS revealed that disposable cameras, hairdryers and lip stick were dropped from the indexes, while Blu-ray disc players and computer games were included.

Passengers fear rail fare hike