The rate of consumer prices index (CPI) inflation fell to 2.8% in July, down from 2.9% in June, according to the Office for National Statistics (ONS).
The Bank of England's target for CPI inflation is 2%.
The ONS said the fall in inflation came from lower air fares, discounting by clothing retailers and a reduction in the cost of leisure and cultural goods.
The rate of retail prices index (RPI) inflation also fell, to 3.1%, from 3.3% in June.
Continue reading the main storyThe RPI index is used to calculate many pensions, as well as inflation-linked government bonds. It is calculated differently, as it includes some housing costs and other items not included in CPI. It is typically higher than the CPI measure.
At 2.8% the rise in the Consumer Price Index is still well above the Bank of England's target of 2%, though it is at least the right side of the threshold at which the governor of the Bank would have to write an open letter explaining why inflation is too high.
It has been above the target since November 2009, peaking at 5.2% nearly two years ago. And there's another threshold to think about - 2.5%. The Bank's recent "forward guidance", its commitment to keep its interest rate at the current ultra-low level, would be overridden if it expected inflation of more than that, 18-24 months ahead.
If the drop in inflation continues, and many economists think it will, it will be a little less likely the Bank will have to use that override and raise interest rates, before unemployment comes down further.
RPI is also used to calculate changes to rail ticket prices. Regulated fares - those that the government controls - will go up by inflation, as measured by the RPI for July, plus 1%.
The rail fare increase will come into effect in January.
'Close to market expectations'Clothing and footwear costs fell by 3.2%, as lower prices from summer sales took effect. In 2012, the fall from June to July was smaller, as retailers discounted earlier, following poor weather.
The cost of long-haul air fares rose at a slower rate than last year, which provided a large downward contribution to transport costs.
However, this was partially offset by rising petrol and diesel prices. They increased by an average of 0.7p and 0.4p per litre respectively between June and July, compared with a fall during the same period in 2012.
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Reduced leisure costs were one factor in the decrease in inflation, as Phil Gooding from the ONS explains
"Essentially, both the CPI and RPI reports are very close to market expectations," said Investec's Philip Shaw.
"On the CPI, the figures do suggest that the downtrend in inflation is in place and we think that there is a reasonable chance that inflation will be at the 2% target in spring next year."
IHS's chief European economist, Howard Archer said: "Looking ahead, CPI may yet touch 3% in the near term, given difficult near-term base effects and recently firmer oil prices.
"It should start heading gradually down towards the end of the year. Much will clearly depend on oil price developments."
Inflation has remained above the Bank of England's 2% target since December 2009. It reached a 14-month high in June 2013.
If the rate were to rise above 3%, the Bank of England governor, Mark Carney, would be required to write a letter of explanation to the Chancellor, George Osborne.
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