Inflation surges to 2%

Britain's underlying rate of inflation in July bounced up from record lows from the previous month, official figures showed today.

The underlying rate, which excludes volatile mortgage payments, rose 0.5% last month to 2% - still well within the government's target of 2.5%. Changes in food prices, particularly for seasonal foods, boosted prices in July. Other upward effects came from household goods such as furniture, and clothing and footwear.

Underlying inflation "was higher than expected", said a briefing from the investment bank Credit Suisse First Boston. "All in all, this suggests that the 1.5% reading in June was erratic, and we would expect underlying inflation to be at its new level, or maybe just above it, at the end of the year. We expect rates to hold until then."

The headline rate of inflation, which includes mortgage interest payments, rose 0.5% to 1.5%.

July's inflation numbers were released amid a chorus of calls for lower interest rates, with fresh evidence that Britain's long consumer boom is at last waning.

Spending growth fell for a second consecutive month in July, according to the British Retail Consortium (BRC). Bill Moyes, the BRC's director general, said the slowdown meant a rate cut may be needed to prevent a further decrease in spending - the economy's main prop, with manufacturing struggling to recover from its worst slump in a decade.

Last week, the Bank of England in its latest quarterly inflation report raised the prospect of cutting borrowing costs as it revised downwards its forecasts for inflation and growth. The Bank blamed the prospects of weaker growth on the sharpest sustained slide in share prices since the October 1987 crash.

Even the Bank's deputy governor, Mervyn King - the only member of its rate setting committee to have voted in favour of higher rates - has voiced concerns about slowing growth. Earlier this month, the Bank kept rates on hold at a 38-year low of 4% for the ninth month in a row.

The City had expected the Bank to tighten the cost of borrowing some time this summer. But with the more downbeat outlook for world growth from the International Monetary Fund and the Bank of England, analysts are now talking about the possibility of a rate cut, not a rise. The same goes for the US, where the Federal Reserve is holding an interest rate meeting later today. Rates in the US are at 1.75%, a 40-year low.

Although the Bank believes that rising house prices have cushioned consumers from the pain of collapsing share prices, it is worried that jittery households may tighten their belts, thereby further weakening the economy.