Inflation rate continued to ease throughout July

UK inflation slowed to 3.1% last month from 3.2% in June, marking the third consecutive month in which prices have been slower to rise than expected.

However, the Consumer Prices Index (CPI) is still well above the target rate of 2% set by the Bank of England.

According to the Office for National Statistics (ONS), the Retail Prices Index (RPI) eased  from 5% to 4.8% in June.

Bank of England Governor Mervyn King has once again been forced to write a letter to the chancellor of the exchequer explaining the overshoot - the third letter of this kind in the last 8 months.

The governor explained in his letter that although the Bank's Monetary Policy Committee (MPC) were "surprised" by the recent strength of inflation, this was mainly as a result of "temporary" factors.

These factors included January's return to the 17.5% VAT after its temporary drop to 15% throughout the recession; rises to the cost of oil; and an increase in import costs caused by  depreciation in the pound since mid- 2007.

However, Mr King did say: "there remains a significant probability that I will need to write further open letters to you in the coming months".

The Bank recently said it expected inflation to remain higher than originally forecasted for coming months, which was largely due to the planned rise in VAT to 20% from January 2011.

However, Mr King said inflation was likely to fall back below the Bank's 2% target in 2012.

The Chancellor George Osborne said there were "significant uncertainties about the inflation outlook," in his response to the governor's letter.

He also highlighted that the Office for Budget Responsibility - the independent body put in by the coalition government to measure public finances and assess the economy - also forecasts that inflation will fall below 2% in early 2012.

July inflation figures are followed closely as they affect the rate at which future rail fares will increase, which impacts long-distance off-peak journeys. This follows earlier falls in 2010 after RPI hit -1.4% last July.

The main reason behind the inflation rate fall was a fall in transport costs, particularly second-hand car prices and fuel costs.

Other factors included a drop in the price of clothing and footwear.

Those with savings accounts are struggling to earn enough interest on their funds to avoid them being eroded by inflation.

Basic rate tax payers currently need to find an account paying 3.88%, while higher rate tax payers require 5.17%, a rate that's unheard of in the current climate and one that could only get close to meeting using fixed rate bonds with lengthly terms.

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