The annual inflation rate nudged up to a seven-year high in June, hitting the Bank of England's two per cent target as expected, but economists say that won't stand in the way of an August rate cut.

The Office for National Statistics said consumer prices were unchanged on the month, putting the annual rate at two per cent for the first time since the CPI measure was adopted in December 2003. It was also the highest since May 1998.

But economists said the data was unlikely to ring alarm bells at the Bank of England, which had already said it expected inflation to breach its target this year.

"Today's numbers would not be an obstacle to an early rate cut," said John Butler, economist at HSBC.

"The data showed CPI inflation in line with the forecast in the Bank of England's May Inflation Report... a 25 point cut to 4.5 per cent is quite possible at the August meeting," he said.

Short sterling interest futures shrugged off the pick up in CPI, even erasing some losses after the data as contracts continued to price an interest rate cut in the coming months.

The bank kept interest rates on hold at 4.75 per cent for the 11th month running at its meeting last week, amid growing calls for a cut to boost flagging consumer spending.

BoE governor Mervyn King has been keen to emphasise the need to balance a marked slowdown in household spending against various upside risks to inflation.

Soaring oil prices are one of those risks, although the June CPI data showed that crude costs of around $60 per barrel had yet to filter through to petrol pump prices.

Still, analysts said this effect could well drive up inflation in the coming months.

Indeed, figures this week showed input prices - an indication of inflationary pressures further down the line - jumped by 12.1 per cent on the year in June, the fastest rate in 20 years, due to a spike in crude oil costs.

However, the figures also showed that manufacturers had not passed on their increased costs at the factory gate. The largest upward effect on CPI in June came from food, particularly grapes, strawberries and meat, the ONS said.

The food and non-alcoholic beverages component showed an annual rise of 2.2 per cent in June, the highest since February 2004, when it was also 2.2 per cent.

Clothing and footwear also exerted upward pressure on prices, but this was probably because the inflation data were collected before the start of retailers' summer discounting.

But downward effects came from recreation and culture, particularly audio-visual goods such as computers and DVDs, while cheaper package holidays also contributed.

The two per cent CPI target was adopted in December 2003, when Chancellor of the Exchequer Gordon Brown swapped the BoE's inflation mandate from the 2.5 per cent RPIX target. RPIX - which, unlike CPI, includes housing costs - was repeatedly at or above its target before December 2003. In June it came in at 2.2 per cent, in line with forecasts.

Separately, the ONS said the retail price index on which most pay deals are based rose by an annual 2.9 per cent, unchanged from the previous month and slightly above forecasts for 2.8 per cent.