Falling gas and electricity prices for households triggered a sharper than expected drop in inflation last month, official figures showed this morning.

Cheaper utility bills were the main driving force as the Bank of England’s benchmark gauge of inflation on the consumer prices index fell back to an annual rate of 2.5 per cent for last month, down from 2.8 per cent in April, and more than 3 per cent in March.

But City economists sounded immediate warnings that while inflation is now declining sharply, and is set to drop further thanks to falling energy bills this year, this is very unlikely to prevent another increase in interest rates by August.

Mervyn King, the Governor of the Bank of England, last night steeled businesses and homebuyers for a likely further rise in borrowing costs.

In a speech to business leaders in Wales, Mr King said that while the temporary factors that have pushed inflation up to its recent highs may be fading, the Bank was worried by “more persistent inflationary pressures”. These meant that its rate-setting Monetary Policy Committee (MPC) “may need to take further action”, he made clear.

Although headline inflation rates fell back in today’s figures, economists said that the MPC’s anxieties were likely to be further inflamed by a renewed rise in so-called “core” inflation - which strips out the often volatile effects of food and energy costs.

In this morning’s figure “core” prices for goods and services rose by 0.2 per cent last month. That move pushed the annual rate of core inflation back up to 1.9 per cent, from 1.8 per cent in April.

“The acceleration to 1.9 per cent on the core measure will not please the Bank, and as Mr King hinted quite strongly, rates still look set to head higher. The only question is how high rates need to go,” Gavin Redknap, UK economist at Standard Chartered, said.

“Today’s data may add weight to the view (shared by us) that one more rise will mark the peak. But the message delivered by Mr King last night appeared to warn explicitly that rates will go much higher still should the Bank deem it necessary.”

Despite the threat of higher rates, falling utility costs are expected to pushed consumer price inflation steadily back to the Bank’s 2 per cent target by about the end of the year.

The impact of cuts in gas and electricity bills was emphasised as this morning’s data showed that inflation for the utilities sector alone dropped to an annual rate of 5.7 per cent last month, from the heady 7.9 per cent reached in April.

There was also downward pressure on inflation from food prices at the shops. Vegetables, in particular, were down in price, thanks to improved supplies as better weather this year than last delivered enhanced growing conditions amid reports of low demand for some produce. Meat prices dropped too.

There was an additional beneficial impact on inflation as some prices for some clothing, notably outdoor wear, failed to rise this year as they did in 2006.

The upward pressure on inflation last month came from transport costs, as airlines pushed through steep increases in the cost of air travel, especially on transatlantic and European routes. This was in contrast to the same time last year, when fares were falling, although the shift was partly caused by a change in the timing of Easter.

Despite the impact of transport costs, the often-preferred retail price index measures of inflation also dropped back last month. On the RPI, headline inflation fell to 4.3 per cent in May, from 4.5 per cent in April, while on the Bank’s former target measure, RPI excluding mortgage interest payments, inflation dropped to 3.3 per cent, from 3.6 per cent. This still remained sharply above the MPC’s previous 2.5 per cent target on this basis, however.

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