Inflation holds steady and catches out economists

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Most economists expected the Consumer Prices Index to drop to 1.5 per cent.

The other yardstick, the Retail Prices Index, which includes costs such as mortgages, showed the cost of living falling by 1.4 per cent compared with a 1.6 per cent decline in June.

The RPI was also higher than forecast, with the City anticipating a drop to minus 1.7per cent.

Government statisticians blamed a rise in the price of toys, computer games and DVDs - probably caused by the weakness of sterling - for the stronger than expected inflation.

Food inflation continued to slow from the double-digit highs seen last winter and is at 4.1 per cent, the lowest since September 2007.

Food prices fell 0.4per cent month on month in July.

Inflation has proved "stickier" and more reluctant to fall than expected despite the recession and falling oil prices.

Fears of prolonged deflation have receded, but it is likely that interest rates will rise again next year.

The CPI is still expected to fall over the next few months and could dip below one per cent in September.

Charles Davis, economist at the CEBR think-tank, said: "Today's figures surprised, especially considering inflation in the euro zone fell to minus 0.7per cent in July. Part of this is due to the sterling depreciation.

"Furthermore, there are signs of recovery in global demand which has led commodity prices to rebound."