Lenders help keep inflation down

The Bank of England's decision to cut interest rates in July pushed the headline rate of inflation down last month after mortgage lenders cut the cost of borrowing, official figures showed today.

The rate of inflation - measured by the retail price index - dipped after banks and building societies followed the 0.25% cut in interest rates to 3.5% by reducing their own interest charges, according to the Office of National Statistics (ONS).

Meanwhile, the usual measure of underlying inflation - which excludes mortgage interest payments - remained unchanged at 2.9% last month.

The news means that inflation has now been above the Government's 2.5% target for 10 months.

On top of July's interest rate cut, house prices rising in August by less than a year ago also led to a large downward contribution to the rate of inflation.

City economists had forecast a rise in the underlying rate of inflation back to its recent peak of 3%, last seen in April.

Another large downward impact came from leisure services, mainly due to the cost of foreign holidays, which fell this year in contrast with increases last August. Entertainment and other recreational costs saw theatre admission prices fall this year after rising in 2002.

Upward effects on inflation came from motoring expenditure, where petrol prices rose last month having been unchanged in August last year. The price of cars and other motor vehicles also fell this year by less than a year ago.

Another large upward effect came from clothing and footwear, where prices increased by more this year than in 2002, partly due to less discounting by retailers.

There was a rise in the Harmonised Index of Consumer Prices (HICP) - used in the euro zone and due to be adopted in Britain - which climbed to 1.4% in August compared with 1.3% in July.

Large upward effects to HICP came from clothing and footwear, and from alcoholic beverages and tobacco, as the price of wine rose this August but fell in 2002. This was partially offset by a large downward effect from recreation and culture.