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UK Inflation dropped to 3.2 per cent in June from 3.4 per cent in May, its second monthly fall.

However, this is still above the Bank of England’s 2 per cent target for the Consumer Prices Index.

Meanwhile, the Retail Prices Index, which includes housing costs, fell to 5 per cent from 5.1 per cent, according to figures from the Office for National Statistics.

Scott Corfe, economist at the Centre for Economics and Business Research, says: ‘[The] release adds weight to our view that inflation will start to cool off over the remainder of this year. This will come as a relief to the large proportion of the workforce currently subject to wage freezes, as high inflation has significantly eroded their purchasing power. The rise in VAT to 20 per cent in January 2011 will prevent inflation from tailing off completely, but we expect inflation to remain moderate in 2011.’

A reduction in petrol costs and price-cutting by clothing and footware retailers were said to be the largest downward pressures, with clothing and footwear prices falling by 2.1 per cent – the biggest reduction seen in June since the ONS began collecting monthly figures 14 years ago.

Krishan Rama, spokesperson for the British Retail Consortium, says: ‘People are concentrating on the essentials at the moment, so in order to encourage customers to spend more money retailers have been cutting prices. With the widely publicised austerity measures soon to come into force, it’s likely that this trend will continue as people remain cautious about spending money.’

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