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Price wars keep inflation low

Inflation slowed to 1.5% last month as consumers benefited from lower petrol prices and the ongoing supermarket price war.

The figure, which matches the four-and-a-half-year low seen in May, means CPI inflation has been below its target of 2% for eight months in a row - the longest such run since 2005.

Falling petrol prices and lower food and non-alcoholic drinks provided the largest downward contributions to the 0.1% decline in the inflation rate, the Office for National Statistics (ONS) said.

The figure may ease pressure on Bank of England policy-makers as they consider when to hike interest rates which have been at the historic low of 0.5% for more than five years.

Samuel Tombs, senior UK economist at Capital Economics, said stable energy bills, lower import prices and weak wage growth will enable inflation to fall to as low as 1% by the end of this year and remain weak in 2015.

He said: "Although the low inflation outlook is unlikely to prevent the Bank's monetary policy committee from raising interest rates entirely over the next couple of years, it should limit the speed at which they rise."

Food and drink prices fell by 0.2% between July and August and are now 1.1% lower than a year earlier - the biggest figure since June 2002.

There was also downward pressure on the prices of furniture and household equipment.

These falls offset rises among clothing and footwear, which jumped by 2.6% between July and August. Alcohol and tobacco also rose 1% between the same period.

Today's data showed the Retail Prices Index (RPI) measure of inflation, which includes housing costs, also fell to 2.4% from 2.5%.

Chancellor George Osborne tweeted: "Good news inflation has fallen again to just 1.5%, below the 2% target. But people still feeling impact of the Great Recession, so more to do."

Chief secretary to the Treasury Danny Alexander added: "Today's inflation figures are another step on the long road to our economic recovery after the great crash of 2008."

But Labour shadow Treasury minister Catherine McKinnell said: "While this fall in the rate of inflation is welcome, the squeeze on working people continues."

"The most recent figures show pay rising by a record low of just 0.6% - less than half the rate of inflation. Wages after inflation have now fallen by over £1,600 a year under this Government."

IHS Global Insight chief UK economist Howard Archer said August's muted CPI inflation figure was welcome news for consumers' purchasing power as they continue to be hampered by low earnings growth.

He pointed out that inflation of 1.5% in August was still more than double current underlying earnings growth of just 0.6% in the three months to June.

IHS Global Insight expects the Bank to raise interest rates to 0.75% from 0.5% in February, but added low inflation meant there was a growing possibility this could be delayed until the second quarter of next year.

Mr Archer added: "An interest rate hike would highly likely be delayed if the Scots vote for independence on Thursday and there are signs that the economy is being adversely affected in the uncertain aftermath."

Prime Minister David Cameron said in a tweet: "It's welcome news that inflation continues to stay low, meaning more stability and financial security for families."

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