The UK’s inflation rate unexpectedly slowed to 2.6 per cent in June, driven largely by lower prices at petrol pumps and fuelling doubts about whether the Bank of England will raise interest rates next month.

The headline rate was down from 2.9 per cent in May, a near four-year high, according to the Office for National Statistics.

City of London analysts had expected the rate to remain steady in the month and to continue climbing above 3 per cent later in the year.

The pound dropped sharply to $1.3025 in response to the figures, down 0.7 per cent, as many traders bet that the surprise slowdown would limit the likelihood of a rate hike next month by Threadneedle Street.

“The Bank of England has taken a noticeably hawkish line recently, but today’s data casts doubt over a rate hike later this year,” said James Smith, an economist at ING.

“Even if inflation does recover the decision to hike rates still hinges on the growth outlook.”

The Bank's Monetary Policy Committee is more split over interest rates than at any time since 2011. There was a 5-3 vote in favour of keeping the cost of borrowing on hold at 0.25 per cent at its last meeting in June and some in the markets had been positioning themselves for a hike at the August meeting.

However, one dissenting voice on the doveish interpretation of Tuesday's figures was George Buckley of Nomura, who pointed out that the June inflation rate was what the Bank was forecasting for the month in its May Inflation Report and that May's inflation figure had itself surprised on the upside.

“Today’s print may have less relevance for monetary policy than one might think looking at the headline figures," he said, sticking with his previous call that the Bank would hike in August.

Surprise easing

Core inflation, which strips out volatile energy and food prices, was 2.4 per cent, down from the 2.6 per cent in May and also lower than the City consensus had expected.

Inflation had been rising sharply since last year's Brexit vote, largely owing to the 13 per cent slump in the pound in the wake of the referendum, which has sent import prices up dramatically.

The ONS also reported that factory input prices in June rose by 9.9 per cent in the year to June, down from the 12.1 per cent rate in May and much lower than the near 20 per cent peak recorded in January.

The ONS said that the biggest downward drag on the change in the CPI inflation rate between May and June had been transport, with fuel prices falling 1.1 per cent in the month and the annual price growth rate falling from 7.5 per cent to 4.1 per cent.

The price of a barrel of Brent crude oil was $44.8 in June, down from $54 in May and falling from a recent peak of $56.9 in December.

The next biggest drag on UK inflation in June was recreation and culture.

There was also some downward pressure from clothing and footwear and housing an household services.

This was offset slightly by upward pressure on the rate from furniture and household goods and food and non-alcoholic beverages.

Is austerity over? Economics editor Ben Chu explains.

Inflation has been higher than average nominal wage growth in recent months, meaning falling real pay.

Analysts said that this squeeze was unlikely to end sooner, despite Tuesday's prices data.

“While inflation dipping to 2.6 per cent in June offers some relief to consumers, it will still highly likely have been clearly above pay growth, thereby resulting in a further drop in consumers’ real earnings,” said Howard Archer of IHS Global Insight.