INFLATION edged back below 2 per cent in August, figures showed yesterday, indicating that interest rates will stay low for the foreseeable future.

Data from the Office for National Statistics (ONS) showed the underlying rate of inflation dipped to 1.9 per cent last month from the surprise 2 per cent recorded in July, to come in line with economists' expectations.

The headline rate of inflation, which includes home loan payments, was 1.4 per cent, down from 1.5 per cent in July.

Economists said the data indicated interest rates will stay low - either on hold for the forseeable future, or will drop further from the current 4 per cent.

The ONS said the largest downward effect on inflation in August was clothing and shoe prices.

It said price recoveries from the summer sales were less extensive than last year for men's and women's clothing, while shoe prices fell in contrast to last year when they increased.

Against the previous month, clothing prices were up 1.4 per cent, but for the past year they showed a sharp fall, down 5.9 per cent for the 12 months to August to record the same as June and the lowest since records began in 1947.

John Butler, economist at HSBC, said: "This reflects the intense competition within that sector, but it also probably reflects falling costs import prices of clothing and textiles from Asia continue to tumble."

However, he said this was in contrast to rising service sector inflation, such as insurance, motor repairs and restaurants.

"While service sector inflation continues to surge there is little chance of deflation in the overall economy," he said.