August interest rate rise unlikely as cheaper petrol and diesel costs drive surprise fall in inflation

The falling price of fuel has driven an unexpected drop in inflation.

The Office for National Statistics' Consumer Price Index (CPI) measure fell to 2.6% growth in June - after soaring to 2.9% in May.

The rate had been forecast to remain at 2.9% but remains well above the Bank of England's target of 2%.

ITV News Economics Editor Noreena Hertz said the June figures dimmed the prospect of a rise in interest rates next month from the current record low 0.25%.

"Inflation's fall from last month's 2.9% (which was the highest level in four years) is better than the market expected - and is the first drop in the annual rate of inflation since October," she said.

"The main reason for the fall is a drop in motor fuel prices. On the other hand furniture and furnishings got more expensive.

"The fact that inflation has fallen makes me think an August interest rate rise is now less likely."

What contributed to June's inflation fall?

The decline in fuel costs of 1.1% between May and June continued a four-month run of falling prices at the pump.

Petrol prices dropped by 1.1p over the period to 115.3p per litre, while diesel also declined by 1.4p to 117.3p.

Computer games also dropped 0.1% as the lowering cost of recreational and cultural goods contributed to the inflation fall.

Food costs eased back by a smaller 0.3% in June - compared with a 0.4% fall for the same month in 2016 - while the declining price of boxes of chocolates and bags of sweets were also noted.

So does that mean an interest rate rise won't happen?

Bank governor Mark Carney said last month 'some removal of monetary stimulus is likely to become necessary'. Credit: PA

The Bank is certainly less likely to raise interest rates in August.

The pound sank in trading after inflation's drop was revealed - a clear indication the markets don't expect a rate change next month.

Expectations of a potential increase in the cost of borrowing from 0.25% had increased as inflation continued to rise through the first half of 2017.

Three out of the eight members of the Bank's Monetary Policy Committee - which decides on interest rates - had even backed a move to increase rates to 0.5% during the last vote.

But the Bank's deputy governor said only last week he is "not ready" to increase the cost of borrowings with too many "imponderables" in the economy.