(RTTNews) - UK annual inflation eased less than expected in August. But, the annual rate stayed below the central bank’s 2% target for the third straight month. Meanwhile, the Bank of England Governor said the inflation is likely to be volatile over the coming six months.

Data released by the Office for National Statistics showed that British consumer price annual inflation stood at 1.6% in August, down from July’s 1.8%, but above the consensus forecast of 1.4%. This was the lowest rate since January 2005.

On a monthly comparison, consumer prices rose 0.4% in August, slightly larger than the expected 0.3% rise.

The largest downward contribution to the annual inflation rate came from housing and household services. Lower food prices also contributed to the fall in inflation. Meanwhile, transport cost had an upward effect, said the ONS.

Today, Governor Mervyn King told the Treasury Committee that inflation is likely to be volatile over the coming six months, initially falling further below the 2% target, before rising above the target.

Core annual inflation that excludes energy, food, alcohol and tobacco was 1.8% in August, unchanged from last month.

The retail price index slipped 1.3% year-on-year in August versus a 1.4% drop in July. Economists had expected the index to fall 1.4% in August. From July, retail prices recorded 0.5% growth.

At the same time, retail prices, excluding mortgage interest payments, were up 1.4%, while economists were expecting it to rise 1.2% as in July.

Last week, the BoE had decided to maintain its interest rate at a record low of 0.5% and also voted to continue the GBP 175 billion asset purchase programme using central bank reserves. Policymakers expect the asset purchase programme to take another two months to complete.

At today’s Treasury Committee hearing King said, “…it will be the outlook for inflation that will guide when and how quickly the MPC raises Bank Rate back towards more normal levels, and when and by how much the assets purchased since March are sold.” He told lawmakers that the asset purchase scheme is having an impact on the broad money and nominal spending.

The central bank is now considering reducing the rate it pays on reserves of financial institutions to encourage lending. This would ultimately channel the fund into the economy, King added.

He holds the view that the strength and sustainability of the recovery is highly uncertain and the balance of risks to inflation around the 2% target remains on the downside.

In an article published by the New Statesman magazine last week, former BoE’s rate setter, David Blanchflower wrote that King, “the old iron fist of the BoE”, dominated the MPC with his hawkish view on rates. On Tuesday, King said those comments were unwise and not sensible.

On Monday, Andrew Haldane, the Bank of England’s director of financial stability told the Association of Corporate Treasurers in Leeds, regulation might be insufficient to restore public trust in the financial system if financial institutions themselves are not seen to engage in ‘root and branch’ reform to create.

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