LONDON (Reuters) -British annual consumer price inflation (CPI) unexpectedly fell to 6.7% in August, official data showed on Wednesday, raising questions about how much higher the Bank of England will take interest rates a day before its next policy announcement.
Economists polled by Reuters had forecast CPI would rise to 7.0% from July's 6.8% due to a jump in fuel prices and an increase in a tax on alcoholic drinks.
The surprise drop in the inflation rate pushed down sterling sharply against the U.S. dollar and the euro as investors scaled back their bets on future interest rate increases by the BoE.
The Office for National Statistics said the fall was driven by a drop in hotel prices and air fares, which are often volatile, and by food prices rising by less than at the same time last year.
The BoE said last month that it expected inflation in August would rise to 7.1% before falling sharply to around 5% in October which would still be more than double its 2% target.
Investors have expected the BoE to raise interest rates for the 15th time in a row on Thursday, taking Bank Rate to 5.5% from 5.25%. Many economists think that could be the last hike in the BoE's tightening cycle as Britain's economy slows.
Core inflation - which strips out volatile food and energy prices - fell by more than the headline rate to 6.2% from 6.9% in July. The Reuters poll had pointed to a reading of 6.8% in August.
(Writing by William JamesReporting by William Schomberg and Andy Bruce)
