Inflation rate drops to 2.8%

BANK of England Governor Mervyn King today raised the prospect of inflation falling back below target after a surprise drop in June. Driven lower by cheaper foreign holidays, underlying inflation - which excludes mortgage costs - dipped to 2.8% from 2.9% in May. But it remained above the Government's 2.5% target.

However, on the Continental-style harmonised index of consumer prices measure, inflation fell to just 1.1%. That is below the likely 2% target Gordon Brown will set when the Government switches to the new index in November.

King told MPs the changeover was unlikely to affect interest rates in the medium term. 'But in the short run, inflation may well move from being above to below target,' he added.