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Inflation set to stay below target

Inflation is expected to have notched up its seventh month below the Bank of England's 2% target when official figures for July are published tomorrow.

Analysts expect the Consumer Price Index (CPI) measure of inflation to have edged lower to 1.8% after it rose sharply to 1.9% in June as summer sales discounts started later than usual.

It will mean CPI has been below 2% for seven months in a row for the first time since June 2005 - which was the last month of a low-inflation stretch that had lasted several years from 1997.

The Retail Prices Index (RPI) measure of inflation, which includes housing costs, is forecast to fall from 2.6% to 2.5%.

This month's RPI figure will be closely watched by rail commuters as it is used to determine regulated fares including season ticket rises from next year.

The formula allows prices to be increased by an average of RPI plus 1%. Train companies have a "flex" option to add another 2% to some fares, as long as the overall average remains as per the formula.

But it is the CPI measure, used for the Bank of England's target, which will be watched by analysts amid speculation about when interest rates, held at 0.5% since 2009, will start to rise.

Low inflation eases pressure on the Bank for any hike as it considers whether the economy should return to normal borrowing rates following the downturn.

Experts are pencilling in an increase for February next year but a sharper than expected change in inflation could shake up the market's expectations.

Samuel Tombs of Capital Economics - which is predicting a larger drop than some analysts - said: "The key question this month is not whether CPI inflation will fall in July, but by how much."

He said a late start to sales might have seen discounts drift into July, while food prices might also have fallen, predicting a drop to 1.6% which "could have a relatively big impact on the markets".

However, Scotiabank's Alan Clarke took a different view of clothes prices saying the later start to the sales suggested there had been "robust demand" leaving no need for discounts to deal with an "overhang of unsold inventory".

He predicted there would not be "downside payback" from the sales, forecasting CPI to remain at 1.9%.

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