INFLATION fell sharply to a five-year low last month to fuel expectations that the Bank of England will not raise interest rates until after next year's General Election.

The Consumer Price Index (CPI) measure of inflation dropped from 1.5 per cent in August to 1.2 per cent in September, official figures showed.

They revealed the continuing effect of the supermarket price war, with food prices subdued for their longest sustained period for a decade and lower petrol prices also dragging inflation down.

The pound tumbled a cent to below $1.60 as the steeper than expected fall in CPI led to speculation that the Bank of England would delay a rise in interest rates which had been widely expected in February next year.

Rates have been held at 0.5 per cent for more than five years to nurse the economy back to health from the recession but Bank of England governor Mark Carney has said the recovery means the time for a rise is nearing.

However economists said that with the inflation figure so low there was no pressure on the Bank to hike especially at a time when there are fears that weakness in the eurozone, Britain's biggest trading partner, will have a knock-on effect in the UK.

Markit chief economist Chris Williamson said falling oil prices and import costs, plus the supermarket price war and subdued wage growth meant inflation looked likely to continue to fall in coming months.

He added: "While a few months ago, the likelihood was growing that the Bank might need to hike interest rates in late 2014 or early next year, the data are now stacking up to suggest a hike could be delayed at least until next summer, after the general election."

The September figures also meant that the state pension would rise by twice the rate of inflation, or £2.85 a week, next spring.

That is because of the Coalition's "triple lock" which means pensions will rise by at least 2.5 per cent or by September's CPI figure or average earnings, whichever is higher.

Labour pointed out that pay was continuing to fall in real terms, with wage rises lagging behind inflation at 0.6 per cent. Latest employment data published today (WEDNESDAY) is expected to show little improvement.

Shadow Treasury minister Catherine McKinnell said: "The squeeze on working people continues despite this fall in the rate of inflation.

"Labour's economic plan will tackle the cost-of-living crisis and earn our way to higher living standards for all, not just a few at the top."