CUT-PRICE clothing and cheaper energy bills helped keep the UK's rate of inflation below the Bank of England's target for the second month in a row, official figures revealed yesterday.

The cost of living rose by its slowest rate for more than a year last month, with the Consumer Prices Index dropping to 1.8 per cent from 1.9 per cent in July, according to the Office for National Statistics (ONS).

The measure of inflation - the Consumer Prices Index - was last at 1.8 per cent in March last year.

But the Retail Prices Index (RPI), which is often seen as the more representative measure of inflation as it includes mortgage costs, rose to 4.1 per cent last month from 3.8 per cent in July.

The increase was the largest monthly rise since February last year.

The ONS said RPI hit 4.1 per cent largely as a result of mortgage lenders passing on the July quarter-point increase in interest rates to borrowers.

Yesterday's headline inflation figure is likely to reinforce views that interest rates may now have peaked at 5.75 per cent.

Bank of England governor Mervyn King signalled in a speech last week that interest rates would be held until the current turmoil in financial markets passes.

The further drop in inflation, which comes after July's surprise fall to 1.9 per cent, may also fuel expectations that the next interest rate move by the Bank could be a cut, as the global credit crunch threatens the wider economy