The surging price of oil has finally driven inflation above Chancellor Gordon Brown's two per cent in, confirming fears that this month's interest rate cut by the Bank of England may be the only one for some while.
Inflation as measured by the consumer prices index rose to 2.3 per cent for the 12 months to July, up from two per cent in June.
The most powerful single factor was the cost of motoring, which has risen by 7.5 per cent over the past year, mainly because the cost of petrol, diesel and lubricants jumped by 9.8 per cent.
The Bank warned last week that the price of oil was likely to drive inflation above the target for a few months, before easing off next year, but few economists had expected it to move so far or so fast.
Jerry Blackett, policy director at Birmingham Chamber of Commerce and Industry commented yesterday "We recognise that the Bank's job is to hit the Government's inflation target of two per cent. Having a low inflation target and steady growth is of fundamental importance to business and the Bank has done well since 1997.
"We hope that the rise in inflation to 2.3 per cent turns out to be a blip. Otherwise it would be very difficult for the Bank to reduce interest rates, indeed just to hold them at current rates."
Measured by the retail prices index - widely used as a benchmark by pay bargainers, as well as the basis for increases in the state pension and other benefits - inflation stayed unchanged for a third month at 2.9 per cent.
The difference arises because the CPI takes no account of mortgage interest or other costs of homeownership. These fell last month - because house prices are no longer rising as they were last summer and a mortgage interest increase in July last year was not repeated.
This offset the effect of rising oil prices in the RPI. The formula used for the Bank's previous 2.5 per cent inflation target, the RPI without mortgage interest, showed inflation rising to 2.4 per cent from 2.2 per cent in June.
Last month was the first that inflation has breached the Bank's target since the CPI was adopted as the main measure of prices December, 2003 and indeed, an all-time high for the index since it was first calculated in January, 1997.
The all-items RPI, though, touched 3.2 per cent in April this year, before it was reined back by the effect of stagnant house prices and prolonged low interest rates.
At the CBI, Doug Godden, head of economic analysis, took a relatively sanguine view. "We would expect inflation to ease back in due course as the one-off effects fall out of the year-on-year calculations," he said.
Despite the impact of oil prices, all measures of inflation show the cost of services far outpacing that of goods.
The CPI all-goods index fell by 0.8 per cent between June and July, leaving the inflation in the cost of goods only 0.5 per cent higher over the year
The cost of services, by contrast, rose by nearly 1.1 per cent last month, taking the year-on-year increase to 4.5 per cent.
Soaring energy costs also pushed up US consumer prices in July at their fastest pace in three months.
Since the end of July the price of oil has continued to rise sharply. London Brent crude hit a record high of $66.85 a barrel on Monday.
But oil was not the only factor driving British inflation last month. Furniture prices held steady - higher prices in some big retail chains offset summer sales in others - while last year prices fell overall.
The effect was to some extent mitigated by sharper fall than last year in prices for strawberries and grapes. Package holidays, too, were cheaper this year, but rose last July.
