More special offers on summer clothes helped cool inflation

The underlying rate of RPI inflation was unchanged at 2.2% last month, the Office for National Statistics said.

The headline rate of RPI inflation, which includes mortgage interest payments, rose to 3.2% from 3%.

Despite the lower-than-expected CPI figure, analysts said further interest rate rises may still be on the way.

At 1.3%, the CPI is still well below the Bank of England's target of 2.0%.

The CPI differs from the old Retail Price Index (RPI) measure because it excludes housing and council tax costs.

The rise in the headline RPI was mainly due to mortgage interest payments rising this year following a series of rate rises by the Bank of England.

Rates near their peak?

Analysts said the fall in the CPI rate would give the Bank of England's Monetary Policy Committee (MPC) breathing space to sit back and watch as the impact of recent rate rises filters through.

A rate hike in November is a done deal, but these numbers show there is no haste for further hikes after that Brian Hilliard, Societe Generale

The Bank has raised rates five times since November in a bid to keep inflation in check and stem spiralling consumer spending.

But the latest inflation figures could mean the Bank will delay its next base rate increase.

"We continue to believe that the committee will keep rates on hold for the rest of 2004 with another rise early in 2005," said analyst Philip Shaw of Investec Securities.

But economist Brian Hilliard of Societe Generale, was not so sure.

"The temptation in the market may be to believe these figures will stop the Bank of England from raising rates," Mr Hilliard said.

"My view is that a rate hike in November is a done deal, but these numbers show there is no haste for further hikes after that."

Bargains galore

Seasonal price rises on clothing which follow the summer sales were delayed this year, contributing to the fall in the CPI index.

Prices of clothing and footwear were 5.7% lower than a year earlier, the steepest fall since December 2002, the ONS said.

Toys, computer games and consoles were also consigned to the bargain basement, helping to push the inflation figure down.

Food prices, particularly vegetables, were also cheaper compared to last year's blisteringly hot summer when fresh goods prices rose.

"Consumers are very price conscious and competition is strong," said Howard Archer, economist at the Global Insight consultancy.

But while clothes prices were falling, the cost of housing, water, electricity, gas and other fuels rose in August due to a hike in the price of heating oil, which followed the rapid rise in crude oil prices.