Annual CPI inflation fell to 1.8% in June – below the 2% target for the first time since September 2007 – but the figures continue to be flattered by December's VAT cut. Assuming 60% pass-through, inflation would have been about 2.5% in June in the absence of the reduction. (Note that the "CPI at constant tax rates" measure – which rose an annual 2.9% in June – assumes 100% pass-through.)

The June result benefited from a big decline in annual food price inflation to 5.5% from 8.4% in May. This had been foreshadowed by last week's producer price numbers, which suggest a further fall – see chart.

"Core" inflation can be measured by the CPI excluding unprocessed food and energy. The annual increase in this measure fell from 2.1% to 1.9% in May but would be about 2.6% without the VAT cut, assuming 60% pass-through.

CPI inflation averaged 2.1% in the second quarter – above the MPC's 1.9% modal forecast in the May Inflation Report.

Food price inflation has fallen earlier than expected but in other respects today's numbers are consistent with the forecast presented in a previous post, suggesting that the annual CPI increase will slow to about 1% this autumn before rebounding into 2010. The retail prices index fell by an annual 1.6% in June – the decline may extend to about 2.5% this autumn.