Cheap holidays depress RPI

Cheaper foreign holidays saw prices dip again in June. The annual rate of inflation fell from 3.0% in May to 2.9%.

The underlying inflation rate, excluding mortgage interest payments, also fell to 2.8% from 2.9% the previous month. But it has now been above the 2.5% target set by the Treasury for the Bank of England's Monetary Policy Committee (MPC) deliberations over interest rates for eight months in a row.

The good news came just days after the MPC cut interest rates by a quarter of a point to 3.5% - the lowest level since January 1955.

The MPC said the economic recovery remained "hesitant", adding that a cut had been necessary to keep inflation on track in the medium term.

TUC senior economist Ian Brinkley said: " This is a very welcome and timely decision. The rate cut will support growth, give industry more confidence and help lock in the gains from the more competitive pound."

A third inflation measure - the Harmonised Index of Consumer Prices (HICP) - also showed a fall in June 1.1% from 1.2% in May.

The HICP measure is used in the Euro zone and has now become the preferred inflation indicator for chancellor Gordon Brown as part of preparations for the single currency. The inflation target will be based on the HICP from November.