U.K. inflation fell more than expected in July driven by a fall in clothes and alcohol prices, the Office for National Statistics (ONS) said on Tuesday.
Consumer prices rose 1.6 percent in July compared to the same month last year, coming in below the 1.8 percent forecast in a Reuters poll of economists. It remains well below the Bank of England's (BoE) 2 percent target. The figure was also down from June's 1.9 percent reading.
The drop was larger than expected, the ONS said, as the timing of the summer sales had shifted. Alcohol prices also declined slightly in July.
Sterling slipped to a four month-low against the dollar of $1.6640 after the data while the FTSE 100 traded up 0.51 percent.
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Separate data from the ONS showed house prices rose 10.2 percent in the year to June, down slightly from May's 10.4 percent reading, meaning the average house costs £265,000. London again saw the strongest rise of 19.3 percent with an average house price of £499,000.
Interest rate hike 'squashed'
U.K. economic data continue to send mixed messages. Unemployment fell to 6.4 percent for the April to June period from 6.5 percent in the previous quarter and GDP came in at 0.8 percent in the second quarter.
But wages in the period were 0.2 percent lower than a year ago. This was due to employers paying bonuses in April instead of March, but even when bonuses were stripped out, pay rose just 0.6 percent, well below the rate of inflation.
The Bank of England slashed its wage growth target in half last week, forecasting a rise of 1.25 percent this year. This is likely to add to pressure on governor Mark Carney, dubbed the "unreliable boyfriend" for his confusing guidance, to give a clear indication of when interest rates might rise from their current historic lows.
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In the first half of the year, many analysts were expecting a rate hike towards the end of 2014, but many now see the first quarter of 2015 as more likely.
"I think if anyone had thought we were going to get a rate hike this year those numbers would have squashed that expectation," Michael Hewson, chief market analyst at CMC Markets told CNBC in a phone interview.
"I don't see, despite Mr Carney's mixed messages, any flip flopping over whether to raise rates. Those numbers do take any pressure off the Bank of England in terms of a rate hike."
Economists have been worried that an interest rate increase could derail the economic recovery seen in Britain but Carney has constantly reiterated that any hike would be gradual.
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- By CNBC's Arjun Kharpal