Economists are speculating whether interest rates have peaked after official figures revealed inflation has fallen below the Bank of England's target for the first time in more than a year.

The Consumer Prices Index fell to 1.9% in July, down from 2.4% in June, as supermarkets tried to entice customers with price cuts on a range of foods including bread, meat and fish, the Office for National Statistics said.

The drop in the CPI, which caught many experts by surprise, is the largest monthly fall for more than five years.

It also means inflation is now back below the Bank's 2% target for the first time since March 2006.

The decline in inflation should reduce the pressure on the Bank of England to raise interest rates, although inflation levels are expected to rise again after the impact of flood-damaged crops at the end of July is considered.

The Bank indicated in its August inflation report that rates may have to rise by a further quarter of a point to 6% to bring inflation under control.

But the latest figures may mean the Bank gives the issue further consideration, particularly given the current volatility in equity markets.

Heavy discounting by furniture retailers also contributed to the drop in CPI, as stores slashed prices in a bid to attract consumers.

The only upward pressure on inflation came from clothing and footwear prices after a reduction in the scale of summer sales compared with last year.

The Retail Prices Index, which is often seen as a more accurate measure of inflation as it includes mortgage interest payments, also fell from 4.4% last month to 3.8%.

Howard Archer, chief UK economist at Global Insight, said: "This is a massive surprise. Consumer price inflation fell back far more than anyone was expecting in July - including, we strongly suspect, the Bank of England.

"This will undoubtedly take the wind out of the sails of the MPC hawks, and will boost expectations that interest rates have peaked at 5.75%, especially as the current turmoil in global credit and financial markets further dilutes the case for higher interest rates for now at least."

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