Inflation unexpectedly fell to 6.7% in August from 6.8% in July, raising the possibility of the Bank of England resisting a further rise in interest rates.

The Consumer Price Index was expected to show that inflation ticked up to 7.1% but food was the largest contributor to falling prices.

On Thursday the Bank’s monetary policy committee will announce whether to raise the rate. Analysts had been expecting a 25 basis points rise, taking the base rate to 5.5%

Traders are now putting the chances of a hike at 54%, compared to 79% on Tuesday and 90% two weeks ago.

The US Federal Reserve held interest rates steady today but stiffened its hawkish stance, with a further rate increase projected by the end of the year and monetary policy kept significantly tighter through 2024 than previously expected.

The latest data from the UK’s Office for National Statistics suggests the cost of living squeeze may be easing, though economists point to rising oil prices as a new inflationary danger.

Chancellor Jeremy Hunt said:  “Today’s news shows the plan to deal with inflation is working – plain and simple.

“But it is still too high which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses. It is also the only path to sustainably higher growth.”

Giles Coghlan, chief market analyst consulting for HYCM, said that with the pound now at its lowest level against the euro since early August, investors can expect a sterling sell-off to continue today on expectations that the Bank of England will signal that lower rates are on their way at the MPC’s meeting tomorrow.

“Indeed, while we are not out of the woods by any means, the core print coming in so far below the forecast is 6.8% is particularly encouraging,” he said. “With inflation moving in the right direction, the BoE can adjust its focus and hold back from aggressive rate hikes – something that is sorely needed after GDP suffered its biggest drop in over seven months in July.

“As such, with the markets expecting the base rate to peak at 5.5% even before today’s data was released, the latest inflation print should consolidate the view that interest rates are close to their peak.”

David Bharier, head of research at the British Chambers of Commerce, said:   “Today’s CPI rate of 6.7%, while proving stubborn, shows that inflation is continuing to gradually ease off. Producer price inflation (PPI) fell by 2.3%. This should give the Bank of England pause for thought with the interest rate decision tomorrow.” 

Alpesh Paleja, CBI lead economist, said:  “We expect inflation to continue falling over the rest of this year, but the recent uptick in global oil and domestic fuel prices means that the path back down may now be bumpier.”

The US Federal Open Market Committee will announce its interest rate decision at 1900 BST today when chairman Jerome Powell will hold a press conference.

According to the CME FedWatch Tool, there is an almost certain chance the central bank will leave the federal funds rate range unchanged at 5.25% to 5.50%.