The Consumer Prices Index plunged to 1.6 per cent in August as compared with 1.8 per cent in July and well below the Bank of England's 2 per cent mark.

This was the lowest figure since Jan. 2005, however higher than analysts' projection of 1.4 per cent.

Data compiled by the Office for National Statistics said in spite of higher fuel costs, lower food prices dragged the Consumer Prices Index down.

Gas and electricity bills showed little change.

However, the Retail Prices Index inflation measure soared to minus 1.3 per cent as from minus 1.4 per cent a month earlier.

David Kern, chief economist at British Chambers of Commerce said the inflation was somewhat higher than anticipated.

David Kern further said, "The figures do not alter the basic fact that signs of recovery remain fragile, and the main policy priority is to avoid a setback."

Bank of England's Governor, Mervyn King, said the CPI could fall to a level of 1 per cent or even lower over the next few months.