INFLATION figures again confounded the markets yesterday as a sharper-than-expected rise cooled talk of interest rate cuts.

Analysts expecting a 0.3 per cent rise in the underlying rate saw last month's figure surge two per cent from the previous month's record low of 1.5 per cent.

This leaves inflation closer to the Government's 2.5 per cent target and means the Bank of England's decision on interest rates will be finely balanced.

Many City experts have looked for a further reduction from the current four per cent, a 38-year low, as the economic recovery falters amid a consumer slowdown.

The possibility of an autumn cut remains, but Lloyds TSB economist Trevor Williams said: "The market will price this as meaning a rate cut is less likely."

The underlying rate, which strips out mortgage interest payments, has fluctuated in recent months, falling by 0.5 per cent in May and by 0.3 per cent in June, before yesterday's recovery.

The Office for National Statistics said the rise mainly stemmed from one-off base effects, with the fall in seasonal food prices less pronounced than a year ago.

Clothing, footwear and furniture prices also contributed because the impact of summer sales was much less than last year.

The headline rate, which includes mortgage interest payments, also rose 0.5 per cent to 1.5 per cent - the highest level since last October.