Inflation unexpectedly slowed last month, knocking back the chances of an interest rate hike and easing the pressure on household finances.
The Office for National Statistics (ONS) said the Consumer Price Index (CPI) measure of inflation fell to 2.6 per cent in June, down from a near four-year high of 2.9 per cent in May.
While the drop was below economists’ expectations of 2.9 per cent, CPI remained above the Bank of England’s target of 2 per cent.
The fall in the cost of living was largely driven by a slide in fuel and computer game prices, while some upward pressure came from the cost of food, which recorded smaller falls for June compared to the same month a year ago.
Sterling took a tumble following the announcement, as lower inflation means the Bank is less likely to raise interest rates from record lows of 0.25 per cent.
The UK currency, which had touched $1.31 earlier in the day, slipped back to $1.30 and fell by 0.5 per cent against the euro to €1.13.
The Brexit-hit pound has caused inflation to march higher up until this point, tightening the squeeze on consumers who are also grappling with sluggish wage growth. Total pay in real terms sank by 0.7 per cent in the three months to May in contrast to last year, and fell by 0.5 per cent excluding bonuses for the period, according to ONS figures published last week.
Andrew Sentance, senior economic adviser to PwC, said the UK will still see higher inflation this year despite last month’s fall.
He said: “It is still likely that inflation will reach 3 per cent or a little higher in the second half of the year.
“Consumers felt some respite from the inflation squeeze last month, but price rises are still likely to run ahead of wage increases for the rest of this year – continuing the current consumer squeeze and holding back economic growth.”
The main downward pressure on the cost of living came from fuel, which saw the fourth consecutive month of falling prices, dropping 1.1 per cent between May and June.
Petrol prices rolled back by 1.1p over the period to 115.3p per litre, while diesel also declined by 1.4p to 117.3p.
Recreational and cultural goods, which includes computer games, also drove overall prices lower, dropping by 0.1 per cent on the month following a rise of 0.6 per cent last year.