Borrowers warned of more rate rises

Figures from the Office for National Statistics (ONS) revealed that the Consumer Prices Index (CPI) - the official measure of inflation - eased by less than economists were predicting, to 2.4% last month from 2.5% in May.

The ONS data also showed that core CPI inflation, which strips outs food, alcoholic drinks and tobacco, rose to 2%, its highest level for more than a decade. Rates could now hit 6% within a few months as the Bank of England strives to bring CPI back down to its 2% target, said economists.

Malcolm Barr, economist at JP Morgan, forecasts a rise to 6% in September, but added an increase as soon as next month cannot be ruled out. "News that growth is slowing is going to have to arrive quickly if it is to talk the Bank's Monetary Policy Committee (MPC) out of another move in the near term," he said.

The inflation data sent shockwaves through the London market, with the Ftse 100 Index more than 60 points into the red as investors anticipated a further interest rate rise. The pound also continued to strengthen - above 2.04 dollars at a fresh 26-year high - on the inflation news and potential impact on rates.

Further clues on the possible direction of the base rate will be offered on Wednesday, when the Bank publishes minutes of the MPC's July meeting, which saw rates go up by a quarter point to 5.75%.

Tuesday's figures showed that the recent spate of interest rate increases have edged the headline rate of inflation back up, to 4.4% last month, from 4.3% in May. The Retail Prices Index (RPI), which is often seen as a more representative measure of inflation as it includes the cost of mortgage interest payments, rose as lenders passed on May's quarter-point rise in interest rates.

Rising oil prices have also offset cuts in the cost of gas and electricity, which had been expected to see the CPI fall as low as 2.3% in June. Oil is rising fast above the 75 US dollars a barrel mark, near to the all-time record high of 78.65 US dollars seen last August, which is putting pressure on prices at the petrol pumps. The ONS said petrol rose by around 1.2p a litre in June, compared with a fall of 0.9p a litre in the same month last year.

Experts are forecasting CPI to continue easing back towards the Bank's target after hitting its highest level since records began in March. But soaring oil costs pose a threat to inflation, with food prices also a cause for concern as the wet weather hits crops.

Howard Archer, chief economist at Global Insight, said: "I still think the trend will be down, but the retreat in prices might be slower than originally expected."