Surprise fall in inflation

Inflation unexpectedly fell last month, vindicating last week's decision by the Bank of England to cut interest rates.

The crucial underlying rate, which excludes mortgage costs, fell to 2.8 per cent from 2.9 per cent in May.

City economists had predicted an increase to three per cent. Inflation was driven lower by a decline in the cost of foreign holidays.

The European-style harmonised index of consumer prices, which the Government plans to switch to in November, fell 1.1 per cent - its lowest for nine months.

The gap between the two measures now stands at a record 1.7 percentage points.