Inflation hits two-year high

The underlying rate of inflation jumped to its highest level for more than two years last month as the cost of motoring and seasonal foods increased.

The office for national statistics said August's underlying rate, which excludes mortgage interest payments, was up 0.4% to 2.6% - its highest level since March 1999.

The increase is significantly ahead of analysts' expectations and puts the inflation rate above the 2.5% target set by the chancellor, Gordon Brown. The Bank of England uses the underlying inflation level to set interest rates and the sharp jump in August may fuel concern that another cut in the cost of borrowing could lead to more inflationary pressure in the economy.

The consensus in the City, however, is that the rise was only temporary and would not stand block further interest rate cuts from the Bank. Economists expect a UK rate cut any moment after the US Federal Reserve and European Central Bank both shaved half a point off their key lending rates yesterday in the wake of last week's terror attacks in New York and Washington.

The headline rate of inflation, which includes mortgage interest payments also rose, by 0.5% to 2.1% - its highest level for three months. The largest upward effect in August was the price of petrol, which fell by less than a year ago when prices at the pump came down sharply, the ONS said. Yet the price of seasonal foods surged as a result of poor growing conditions and strong demand.

Seasonal foods were 10% more expensive than a year ago with the price of lettuce, tomatoes and cucumbers all increasing. Household services such as the cost of a telephone also moved ahead, while prices on the high street remained firm, reflecting the consumer boom. Prices for clothing and footwear rose by more than a year ago following summer sales, the ONS said.