Inflation has risen to 3.6% in the year to June, up from 3.4% in May, according to the Office for National Statistics.

The increase was higher than expected, with some economists forecasting no change. The jump was due to increases in water bills, energy costs and council tax, as well as higher national insurance contributions, and will create some uncertainty around the Bank of England’s next move.

The Bank was expected to cut the interest rate in August in response to the sluggish economy, but inflationary pressures could cause it to pause.

The base rate has been cut four times in the past year, most recently in May, to 4.25%. 

Matthew Ryan, Head of Market Strategy at global financial services firm Ebury, said: “Dare we say it, but Britain is now stuck squarely in stagflation.

“The economy is contracting, jobs are being shed at a breakneck pace and, all the while, inflation is rising without any signs of having yet peaked.

“This presents a major quandary for the Bank of England. Does the MPC cut rates now in the hope that inflation eases later in the year? Or does it hold off for fear of further stoking price pressures? We still think that an August cut is on the cards, but today’s data means further rate reductions beyond then will likely be very gradual.”

Guy Foster, chief strategist at RBC Brewin Dolphin, said: “Inflation has come in ahead of expectations and inflation continues to edge higher.

“This was unhelpful news for the Bank of England, which wants to cut interest rates to support growth. If interest rates don’t come down, the government interest bill will be higher and the pressure for higher taxes will become more acute.

“The biggest rise in inflation was from energy prices, which rose due to the events in the Middle East. Part of that should reverse, but the impact will be muted. Beyond that, price gains seemed quite broad-based, with services inflation remaining strong. An interest rate cut in August still seems likely but the case is weakening.”

George Holmes, managing director of business finance adviser Aurora Capital, said: “This unexpected small uptick like this won’t derail rate cut expectations entirely, but it does give the Bank of England something to think about ahead of August. For small businesses, it adds more uncertainty they could do without.”

Ben Harrison, director of the Work Foundation at Lancaster University, a think tank for improving working lives in the UK, said: “Today’s CPI inflation figures demonstrate the scale of the challenge the Government faces in driving up living standards through this Parliament.”

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