Despite the surprise drop in inflation, prices are still rising faster in the UK than in several other big economies like France, Germany and the US.

One forecast suggested yesterday that prices will rise faster in the UK than any other major economy this year.

The Organisation for Economic Co-operation and Development said UK inflation would average 7.2% in 2023.

It said this would be the highest rate in the G7 group of major economies. It's worth bearing in mind there are some differences in how countries measure inflation.

Read more here.

The surprise drop in the UK inflation rate pushed down the value of the pound against the US dollar and the euro in early trading.

Investors were expecting a rise in interest rates tomorrow from the Bank of England - which generally makes the pound more valuable in the markets.

But it seems investors are now scaling back their bets on a hike in the base rate.

Sterling hit $1.2355 on Wednesday morning, the lowest level seen since May.

Before today's figures, analysts expected the Bank of England to raise interest rates for the 15th time in a row, hiking its "base rate" to 5.5%.

A slowing in the rate of food inflation was a key factor in the overall fall in inflation.

Price rises for food and non-alcoholic drinks eased to 13.6% in August 2023, down from 14.9% in July.

Price rises for milk, cheese and eggs slowed the most, while fish and vegetable prices also eased.

Remember - when the rate of inflation falls, it does not mean prices are coming down, but that they are rising less quickly.

Darren Jones, Labour's shadow chief secretary to the Treasury, tells BBC Breakfast that going from 6.8 to 6.7% "will mean very little to families across the country that can't afford to pay their bills".

Jones said families' average bills are up by "around £400 a month because of the price of petrol, energy, food and other things that we have to buy day in day out".

"So a 0.1% change in the headline rate of inflation is no way near the action we need to see from this government.

"It is not delivering on Rishi Sunak's promise to this country that he was going to half inflation and reduce the cost of living for families."

Inflation stubborn - but government more likely to hit targetpublished at 07:27 British Summer Time 20 September 2023

07:27 BST 20 September 2023

Dharshini David
Chief economics correspondent

It was some of the areas which saw the largest price rises earlier in the year - food, hotels and restaurants - which helped inflation to fall against expectations in August.

Although many of those items were still getting more expensive, the rate at which their prices increased has slowed.

The Bank of England focuses most closely on so-called core inflation which disregards food and energy but includes items such as the prices of meals out, clothes and entertainment.

That too has slowed, from 6.9% to 6.2% - suggesting that firms may be finding it harder to push through higher prices, as consumers become more wary about shelling out on treats.

The numbers raise questions over whether the Bank of England will raise rates tomorrow.

The chancellor says they show that the plan to cut inflation is working.

The data increases the chances that the government meets its pledge to halve inflation this year - but inflation in the UK remains particularly stubborn compared to other rich countries.

The fall in inflation came despite a sharp rise in average fuel prices, today's figures show.

According to the Office for National Statistics, the average price of petrol rose by 5.3p per litre between July and August 2023 - to stand at 148.5p per litre in August 2023.

These sharp rises are in contrast with a steep decline at the same time last year, after record prices were seen in July 2022.

Chancellor Jeremy Hunt says today's news shows the government's plan to deal with inflation is working - "plain and simple".

"But it is still too high," he adds, "which is why it is all the more important to stick to our plan to halve it so we can ease the pressure on families and businesses.

"It is also the only path to sustainably higher growth."

In August, core inflation was 6.2% in the 12 months to August 2023, down from 6.9% in July.

Core inflation excludes the price of energy, food, alcohol and tobacco.

The Bank of England considers this number as well as CPI - the headline rate - when deciding whether to alter interest rates.

Here's our latest chart, showing the continuing fall in the UK inflation rate.

We've just heard from Grant Fitzner, chief economist at the Office for National Statistics on what's behind the easing in August's inflation figure.

He said that it was partly down to falls in the costs of things like hotel stays or air travel, which can be quite volatile.

He added that food prices had risen by less than the same time last year.

Inflation in the UK fell to 6.7% in August from 6.8% in July, according to the Office for National Statistics.

Faisal Islam
Economics editor

Here’s what to watch for in the latest figures for annual inflation, released very shortly.

Are they going to back up? Having fallen sharply in recent months, there is a risk the rate of annual price rises for August goes back up above 7%.

This could be because of rises in fuel prices and the effect of some increases in duty on alcohol.

This could be concerning news, showing inflation going in the wrong direction, after falls in other major economies.

The government is likely to see such a move as a “blip” that should certainly turn around later in the autumn, when domestic energy bills are cut again.

The pattern in underlying measures of inflation, especially in the services industry, will be what the Bank of England will be examining carefully.

Interest rates are likely to rise further tomorrow as it seeks to contain price rises - but just how high rates go will depend on whether inflation remains stuck at high levels.

Image source, Getty Images

Earlier this month, Chancellor Jeremy Hunt told the BBC: “I do think we may see a blip in inflation in September.

"But after that, the Bank of England is saying it will fall down to around 5%.

“And you know, if we are going to put money in people’s pockets quickly, the fastest thing I can do is to deliver the prime minister’s pledge to halve inflation, because that puts not 1p in the pound, which might be a tax cut, but 5p in the pound in people’s pockets that they wouldn’t have had if inflation stays high.”

Inflation measures how quickly the prices of goods and services are rising (or falling).

Soaring food and energy bills have been pushing prices up. Although wholesale gas prices have come down sharply since last year, they are still much higher than before the Covid pandemic and Russia’s war in Ukraine.

The soaring cost of energy has been a key factor driving the UK’s high inflation rate in recent months. Oil and gas were in greater demand as life got back to normal after Covid.

At the same time, the war in Ukraine meant less was available from Russia, putting further pressure on prices.

Read more here.

Rishi Sunak says halving inflation is one of his top five priorities, external for 2023.

Inflation was at 10.7% in the three-month period between October and December 2022, and was 10.1% in January.

Inflation fell to 6.8% in July, its lowest level in more than a year. In response, Sunak said, external that it was proof that his policies were working.

Dharshini David
Chief economics correspondent

Inflation takes funds out of household and business budgets, thwarting living standards and expansion plans - and this bout isn’t over.

Food prices typically remain far higher than a year ago. Higher fuel prices may have pushed up the rate to 7% - or more - in August.

Economists, the chancellor and the Bank of England are braced for that - it reflects the higher global price of oil, outside of our control, and may be short-lived.

But what concerns the interest rate setters is so-called core inflation, which excludes the likes of food and energy, and the prices of services - think bars, restaurants and shops.

Those prices have been increasing at a faster rate than the Bank likes - a sign that some customers are still flush enough to spend on treats, perhaps because of money saved during the pandemic or wage rises.

It’s that spending the Bank targets when it raises interest rates - so these numbers could lead to another hike brewing, possibly tomorrow.

Owen Amos
Live reporter

Welcome to our coverage of the UK inflation figures, which are released at 07:00 BST.

Last month's figure of 6.8% put inflation at a 15-month low - but that’s still way above the Bank of England's long-term target of 2%.

Rising fuel prices this August are likely to push today’s inflation figure up, because last August fuel prices saw quite a big fall.

Chancellor Jeremy Hunt and Bank of England Governor Andrew Bailey have both called the expected rise a "blip".

But any rise will increase pressure on the government - it has pledged to cut inflation to 5% by the end of the year.