British inflation unexpectedly fell further below target to its lowest in more than a year in August, official data showed today, giving the Bank of England room to cut interest rates if the credit crisis deepens.
The Office for National Statistics said consumer prices rose 1.8 per cent on the year last month. Analysts had expected inflation to hold steady at 1.9 per cent.
The Bank of England is unlikely to be surprised to see inflation at these levels - it said earlier this month that inflation was likely to remain below or around the 2 per cent target for the next few months.
Still, some analysts are now beginning to predict borrowing costs will have to fall this year because of the ongoing credit crisis.
"I don't think we are going to get a rate cut this year, but this does give the Bank some leeway," said Ross Walker, an economist at RBS. "If they need to cut rates, this helps."
The main downward effect on consumer price inflation came from some mortgage lenders cutting their exit administration fees. Those cuts took 0.05 percentage points off the annual rate.
There was also a large downward effect from utility bills as major service providers phased in advertised tariff reductions.
Housing, water, electricity, gas and other fuels inflation slipped to 2.8 per cent from 3.5 per cent in July, the lowest rate since March 2004.
Clothing and footwear also exerted a downward influence as women's clothes prices rose less than a year ago.