Inflation rate holds steady but will drop

INFLATION unexpectedly held steady in July, as rises in the prices of games, toys and hobbies offset falls in the cost of food and drinks. But economists warned that deflation still looms.<br /><br />The Office for National Statistics said that the consumer price index (CPI) &ndash; the government&rsquo;s preferred measure &ndash; was unchanged from June, keeping the annual rate at 1.8 per cent.<br /><br />Analysts had predicted that inflation would fall to 1.5 per cent, below the Bank of England&rsquo;s two per cent target.<br /><br />&ldquo;CPI has proved to be a bit more sticky than we thought it would be. However, I do think the rate of inflation will fall quite sharply in August and September,&rdquo; said Deutsche Bank economist George Buckley.<br /><br />Much of the reason for the surprisingly strong CPI reading came from computer games and DVD prices, which rose this year but fell last year.<br /><br />Alcohol and telephone costs also had an upward effect while downward pressure came from meat, vegetables and take-away food prices.<br /><br />The retail price index (RPI) , which includes volatile items such as housing costs and oil prices, increased to -1.4 per cent, from -1.6 per cent in June, against market forecasts for a sharper decline.<br /><br />The RPI &ndash; which is used to determine items such as wages and rail fares &ndash; was lifted by the same factors as the CPI, as well as an easing in the drop in house prices.<br /><br />Sterling shot up around half a cent against the dollar and government bond prices fell after the strong reading caught investors by surprise.<br /><br />But most analysts said that further signs of stickiness in inflation would dampen expectations of any further monetary policy easing.<br /><br />&ldquo;It does call into question further Quantitate Easing and even the latest policy decision,&rdquo; said Ross Walker, an economist at RBS.<br /><br />The Bank, which also expects CPI to drop below one percent this year, has slashed interest rates to a record low of 0.5 per cent and unleashed a &pound;175bn quantitative easing programme to kickstart lending and grow the economy.