Inflation in Britain slowed more than expected and further below its 2.0 percent target in July as furniture shops offered the biggest-ever summer discounts, but analysts still predict more interest rate hikes ahead.
The Office for National Statistics said the consumer price index fell 0.3 percent on the month in July, taking the annual rate of inflation down two tenths of a percentage point to 1.4 percent, below the consensus forecast of 1.5 percent.
But economists said the Bank of England had last week predicted an easing in inflation in the near-term when it raised interest rates by a quarter-point for the fifth time since November and is more concerned with price pressures further out.
"More important for monetary policy strategy is the medium-term outlook for inflation. We will learn much more about the BoE's view tomorrow with August's Inflation Report," said Philip Shaw, chief economist at Investec.
"We expect this to present a similar outlook to that expressed last time around: that unless interest rates continue to rise from their current level, inflation is set to rise above the 2.0 percent target over the next two years."
Analysts expect borrowing costs to rise by at least another quarter-point to 5.0 percent by the end of the year. But expectations of a hike as soon as next month receded somewhat after the data were released, pushing the pound lower.
The biggest downward impact on the inflation rate came from furniture as discounting in the summer sales was much deeper than a year ago, perhaps reflecting lower demand in a sign that Britain's booming housing market may be cooling down. Prices of furniture and furnishings fell 4.0 percent on the month, the biggest July fall since records began, the ONS said.
Despite heavy discounting in some areas, survey evidence has so far suggested that consumers didn't bite. The British Retail Consortium said earlier on Tuesday that annual sales growth slipped to 1.8 percent in July from 2.4 percent in June.
Economists said the downward pressure exerted by petrol prices may soon be reversed, however, as oil prices have surged again in August.
Air fares could also have a big upward impact in the next set of figures. Both British Airways and Virgin Atlantic have both raised their fuel surcharge on long-haul flights in response to the rise in oil prices.
Separate figures showed Britain's goods trade gap with the rest of the world widened unexpectedly in June to 4.97 billion pounds from 4.82 billion pounds in May. Analysts had predicted a gap of 4.5 billion pounds.
That widening brought the quarterly goods and services gap to a record 10.8 billion pounds from 9.2 billion in the previous quarter.
The ONS said the widening in the goods trade gap in June was driven by a fall in the oil surplus. At 22 million pounds, the oil surplus was the smallest since August 1991, when there was a deficit of 20 million sterling.