Inflation rise surprises City

Britain's inflation rate rose unexpectedly in July, official figures showed today, dimming prospects for another cut in interest rates this year.

Boosted by bumper sales of clothing and footwear prices in June, the underlying rate of inflation - which excludes volatile mortgage payments - rose by 2.9%, up from 2.8% last month, the office for national statistics (ONS) reported.

The headline inflation rate, which includes mortgage payments stood at 3.1% on the year, its highest level since May.

The rise surprised the City, which had been expecting a drop in inflation, and reinforced sentiment that the next move in interest rates will be up. Inflation has been above the Bank of England's 2.5% target for nine months in a row.

"These are disappointing figures and reflect shallower discounting by retailers in the summer sales," Philip Shaw of Investec told Reuters. "While we still see inflation heading back towards target later in the year, this could now take longer than we had thought. It will also encourage the MPC [the Bank of England's monetary policy committee] to sit on its hands for a while longer while it waits to see how the economy develops."

Even before today's inflation numbers, the prospects of more rate cuts were fading amid strong consumer spending figures - personal debt hit a record ?10bn in June - and signs that even the long-suffering manufacturing sector was showing signs of revival.

The Bank will present its quarterly outlook for inflation tomorrow, a week after it kept interest rates at a 48-year low of 3.5%. The MPC last cut rates in July, trimming the cost of borrowing by 0.25% in a move that surprised analysts. The Bank received an advance copy of the latest data last week, before it made its interest rate decision, the ONS said.

The largest upward pressure on inflation came from clothing and footwear prices, especially women's outerwear. Fares and other travel costs also boosted prices, as the ONS included a new index for air fares which picked up seasonal ticket price rises for the first time.

The largest downward effect came from alcoholic drinks and the further dampening from house prices, which rose less than they did a year ago.

There was also a rise in the harmonised index of consumer prices (HICP), used in the eurozone and due to be adopted in Britain in November. The HICP climbed to 1.3% in July from 1.1% in June.