Inflation drops to 2.5 per cent in August

Inflation fell to 2.5 per cent in August, spurred by a fall in the price of gas, household equipment and clothing, according to official data out this morning from the Office for National Statistics.

The Consumer Prices Index measure of inflation, fell to from 2.6 per cent in July. It was partially offset by a rise in the price of fuel.

The Retail Prices Index, which is the measure used for index-linked gilts, fell to 2.9 per cent down from 3.2 per cent, largely thanks to a drop in the price of household goods, clothing and food.

The Bank of England has been hoping that inflation will ease back towards its two per cent target over the next few months, boosting cash-strapped Britons'spending power and supporting consumption.

The central bank predicts that inflation will ease below its target by early 2013, but a renewed rise in oil prices and higher commodity costs threaten to push prices up again.

Meanwhile, it is understood the government is considering cutting the link between benefits and inflation to save the public purse.

Under current laws, this would mean benefits rose by 5.2 per cent this year.