Britain's inflation rate rose unexpectedly in July, firming expectations that a two-and-a-half-year cycle of falling interest rates has run its course.

The Office for National Statistics (ONS) said yesterday that retail price inflation excluding the cost of home loans (RPIX) nudged up to an annual 2.9 per cent in July, surprising economists who had expected a slight decline.

Clothing and footwear prices were the chief culprit behind the jump in inflation from 2.8 per cent in June. Booming demand on the high street in June meant that retailers saw less need to cut prices in the usual summer sales.

Interest rate futures and gilts immediately fell as expectations in the market rose that the next move in interest rates will be up. But analysts cautioned that the Bank of England would likely hold fire on rates until it sees the current tentative global economic recovery firmly on track.

"The rise in inflationary pressures clearly adds further weight to suggestions that the next move in interest rates will be up," said Ms Robyn Barnett, economist at UBS Warburg. "However. . . the hesitant nature of the global recovery, coupled with a still fragile picture in the manufacturing sector, suggests that interest rates could remain steady at 3.5 percent for some months to come."

Inflation has now topped the Bank of England's (BoE's) target rate of 2.5 per cent for nine months in a row, but economists believe price rises are still on a downward path.

"While we still see inflation heading back towards target later in the year, this could now take longer than we had thought," said Mr Philip Shaw, economist at Investec.

Economists still expect the BoE's inflation report, which it publishes today, to downgrade its forecast for growth in the British economy.

The BoE had an advance copy of the figures before it made its decision last week to hold interest rates steady at a 48-year low of 3.5 per cent.

The ONS said the Harmonised Index of Consumer Prices (HICP), which the government will target from November, was up 1.3 per cent on the year compared with forecasts of a fall to 1 per cent. The likely target for HICP, however, will be 2 per cent.

Month on month, the RPIX declined 0.1 per cent in July against expectations of a decline of 0.3 per cent. The all-items inflation rate, stood at 3.1 per cent on the year, its highest level since May.