Benchmark UK inflation rocketed much higher than feared in July, to 4.4% from 3.8% in June, while the old retail prices index measure hit a 17-year high of 5%.

Benchmark UK inflation rocketed much higher than feared in July, to 4.4% from 3.8% in June, while the old retail prices index measure hit a 17-year high of 5%.

But financial markets focused not on yesterday morning's dire official inflation data but on the latest signs of economic weakness, in the form of weak retail and housing market surveys.

The pound would, other things being equal, be expected to rise on the back of such high inflation numbers.

However, sterling weakened significantly against the US currency and fell below $1.90 for the first time since late 2006.

Sterling touched an intra-day low of $1.8970. It was last night trading around $1.8998 - about one-and-a-half cents weaker than its close in London on Monday.

UK Government bond yields also fell, even though such strong inflation data would in many cases be viewed as hardening the interest-rate outlook.

The September gilt future finished 0.55 points higher at 108.7, having touched a new contract high of 108.76 during the session.

The leap in inflation did not change City economists' view that the Bank of England will refrain from any rise in interest rates, given the fast-deteriorating economic backdrop.

The Bank's Monetary Policy Committee would have seen an advance release of the July inflation numbers before holding UK base rates at 5% last Thursday.

Some economists felt the inflation surge could, however, delay the timing of the first cut in UK base rates.

More substantive guidance on the UK interest-rate outlook should come today with publication of the Bank of England's latest quarterly inflation report.

The Office for National Statistics said yesterday that a rise in food prices was the biggest single factor in the latest rise in benchmark annual UK consumer prices index inflation - which at 4.4% is now significantly more than double the Bank of England's 2% target.

The ONS highlighted a rise in bacon, ham and poultry prices, compared with a fall a year earlier, and upward effects from bread, cereals, and vegetables.

July's 4.4% inflation rate is the greatest since the CPI data series began in January 1997. It came in way ahead of the consensus City forecast of 4.1%.

The ONS said that a further large upward effect on the annual inflation rate had come from rising fuel costs, with a 1.2 pence rise in the average price of a litre of petrol to 118.8p between June and July contrasting with a 0.4 pence dip at the same time last year.

The other big upward contributions were from gas and electricity bills, which were unchanged this July but had fallen a year earlier, and from lesser discounting this year than last of furniture and furnishings, particularly kitchens, and of clothing and footwear.

On the old all-items retail prices index measure, that is still used in wage bargaining, annual inflation jumped from 4.6% in June to 5.0% in July. This is the highest since July 1991.

The old underlying inflation measure of RPI excluding mortgage interest payments jumped from 4.8% to 5.3%.

The Bank of England was charged with keeping this underlying "RPIX" measure at 2.5% before the switch to the CPI target of 2% was announced in then Chancellor Gordon Brown's December 2003 Pre-Budget statement.

Ross Walker, UK economist at Royal Bank of Scotland, did not believe yesterday's consumer prices data changed the outlook for inflation significantly.

Walker, who was towards the upper end of the range of City forecasts with a 4.3% prediction for CPI inflation in July, said of yesterday's data: "Short term, it means the profile will be marginally higher, but only marginally."

Referring to the recent tumble in oil prices, with benchmark US light crude down from an all-time high above $147 a barrel in early July to about $113 a barrel by last night, Walker added: "Maybe once you get (to) late autumn, given what is happening with crude oil and wholesale gas prices, you will more than take that (latest rise in inflation) back. I don't think it really changes the basic inflation picture."

He sees little danger of a rise in UK base rates being triggered by the recent surge in inflation. Walker believes minutes of the Bank of England Monetary Policy Committee's August 6 and 7 meeting, at which base rates were held at 5%, will show when they are published next Wednesday that seven members voted for no change, with one preferring a rise and one a cut.

This was the vote when rates were held in July, with resident hawk Tim Besley pushing unsuccessfully for a rise and dove David Blanchflower wanting to see a cut.

Walker told The Herald yesterday: "In terms of (monetary) policy, I never thought there was that much chance of a hike (in base rates) and I still don't.

"Of course, they (the MPC) would have known these (inflation) numbers before the August decision. It may transpire in a week's time we had a five-four vote, but I think it will be another one-seven-one.

"I think what today's numbers mean is the chances of a cut this year have certainly receded. The peak (for inflation) probably isn't going to come until October. We won't get those numbers before the middle of November. They (the MPC) may want to play Santa Claus in December but I doubt it."

Walker is forecasting the MPC will cut base rates by a quarter-point in February and again in May, taking them to 4.5%. He noted the consensus among economists was that there would be one more quarter-point cut than he is forecasting.

However, Walker believes the MPC will want to "proceed cautiously", particularly given his expectation that Chancellor Alistair Darling will loosen fiscal policy significantly in his Pre-Budget report in the autumn.

Walker also noted the potential upward impact on inflation from downside risks to the value of sterling.

"I await the Pre-Budget report in October (or) November to see what they do with the fiscal rules. I suspect we are going to get some quite significant fiscal loosening."