Inflation was lower than expected in June, meaning the chances of interest rates rising have fallen.
Data from the Office for National Statistics (ONS) this morning showed inflation of 2.4 per cent in June, lower than the expected rate of 2.6 per cent.
The 2.4 per cent rate was the same as in May but the ONS said a summer clothes sale reduced prices sufficiently to offset the impact of higher fuel costs.
Ben Brettell, chief economist at Hargreaves Lansdown, said: "The pound dropped sharply on the news, losing around three-quarters of a cent against the dollar as traders revised their bets on an August rate rise.
"Sterling has been unwanted of late, falling heavily in the past few weeks amidst political turmoil in the UK.
"Markets had been pricing in around an 80 per cent chance the Bank would lift borrowing costs in August, but today’s inflation data combined with yesterday’s lacklustre wage growth figures could force policymakers into a rethink.
"That said, output price inflation ticked up to 3.1 per cent and raw material costs jumped 10.2 per cent, so there are some signs inflationary pressure is building."
There are two types of inflation. One is demand pull inflation, which is caused by an excess of demand over supply in the economy and boosts economic growth because businesses expand to make the products or services to meet that demand.
But inflation caused by higher input costs, which is what is presently happening in the UK, is the result of the costs of producing goods and services, usually oil or metal prices, rising, which is bad for economic growth, as it makes expansion a less economically attractive option for businesses, and reduces the level of demand in the economy, denting economic growth.
Neil Birrell, chief investment officer at Premier Asset Management said: "The economic data from the UK economy continues to be confusing and may lead markets to doubt the expected interest rate rise at the start of next month. Sterling will suffer in the short term."