UK inflation fell in July. The Consumer Price Index (CPI) fell from 3.2 per cent in June to 3.1 per cent in July, RPI (Retail Price Index) also fell by a small amount from five per cent to 4.8 per cent.

RPI includes the cost of housing such as mortgage interest and council tax, which is not included in CPI calculation.

The CPI figure is still above the Bank of England’s two per cent target and is likely to remain so until the end of 2011, according to the Governor of the Bank of England.

Mervyn King explained the figures in a letter to the Chancellor of the Exchequer. He said the return of VAT to 17.5 per cent in January after the 2.5 per cent reduction set during the recession was one of the “temporary factors” resulting in the recent strength in inflation figures. King added that the depreciation of the pound also played a significant part by causing a rise in oil and import prices.

However, he also informed the Chancellor that there “remains a significant probability” that he will have to write more open letters to him in the coming months. “We know from our experience in the 1970s and 1980s how destructive high inflation can be”, said King.

Inflation is expected to remain higher than previously forecast because of the 2.5 per cent rise in VAT set to be implemented in January next year. However, the Office for Budget Responsibility still expects inflation to fall below 2 per cent in 2012.