The annual underlying rate of inflation rose by half a percentage point last month to 2%, official figures showed on Tuesday.

I think we've got rates at 4% until something changes

Geoffrey Dicks Royal Bank of Scotland

But it was still well below the Bank of England's target rate of 2.5%, with 1% leeway either way.

The headline rate of inflation, which includes mortgage interest payments, also rose half a percentage point to 1.5%, the Office for National Statistics (ONS) said.

But it warned that the data could have been distorted upwards by the effect of the Queen's Golden Jubilee celebrations and the World Cup, which meant that some summer sales started in June instead of July.

Rates on hold

The ONS said a key reason for the rise was smaller falls in food prices, particularly seasonal food.

Price changes for furniture, housing costs and car tax and insurance also helped drive inflation higher.

Geoffrey Dicks, an economist at the Royal Bank of Scotland, said the rise in inflation did not change the picture because July's figure was still below the inflation target.

"I think we've got rates at 4% until something changes," he said.

The case for a cut

Figures from the British Retail Consortium late on Monday showed that the rate of spending on the UK's High Streets slowed last month.

The BRC said that retail sales in July rose by 3.8% compared with last year, but were down from 4% in June and far lower than the 7.5% growth rate achieved in March.

There was never much of a 'retail boom' in the sense of unsustainable sales growth - but if there was it has come to an end

Bridget Roswell BRC

The BRC said the slowdown was far from a collapse, but it did add to the case for a further cut in interest rates.

The director general, Bill Mayes, told BBC Radio 4's Today programme: "It is very much in the Government's interest to make sure that consumer demand remains fairly strong.

"That is what kept the economy going in the last 12 to 15 months or so and it would be a great mistake to dampen down consumer demand too quickly."

End of retail boom

The BRC said some retailers saw mixed results because the timing of the summer sales varied compared with a year earlier.

Customers were reported to have taken advantage of the summer sales, as the hot spell of weather gave stores a chance to promote summer fashions after a wet June.

Clothing performed well but sales of groceries and home wares proved sluggish, according to the BRC.

Bridget Roswell, chief economic adviser to the BRC, pointed out that July's sales growth was weaker than any month last year.

"There was never much of a 'retail boom' in the sense of unsustainable sales growth - but if there was it has come to an end," she said.