Bank of England Governor Mervyn King said rate-setters had been shocked at the recent strength of inflation in his open letter to Chancellor George Osborne as inflation edged down from 3.2% to 3.1% in July, but remained stuck well above the Bank's 2% target.

Rising food costs equalizes the impact of falling petrol prices over the month on the Consumer Prices Index (CPI)

The Governor said that inflation fall is both difficult to judge with substantial risks in both directions. The Bank lowered growth predictions in its quarterly report after facing criticism and said inflation would be higher than first thought.

The Governor said the huge economic slack created by a record recession was being masked by January's VAT hike, high oil prices and sterling's weakness pushing up import prices which adds to inflation pressure.

Jonathan Loynes, chief European economist with Capital Economics, said that high inflation has become ingrained in the economy or that the MPC is deliberately turning a blind eye to persistent price pressures. He added that a majority of the bank's rate-setting committee were comfortable with record low interest rates to boost the economy for some time

Andrew Goodwin, senior economic advisor to the Ernst & Young ITEM Club told that Earnings growth remains below 2% and it is difficult to make a case for inflation in the current climate, with unemployment remaining high.

The Office for National Statistics figures showed a 0.7% jump in food prices between June and July driven by higher costs for meat, fruit and vegetables.

The annual rate of food inflation rose to 3% while the Russian drought and rising wheat prices is set to build food inflation in the months ahead.

But falling petrol costs and second-hand car prices over the month dragged down the overall CPI. The squeeze on food shopping bills also contrasted with retailers cutting prices in a bid to draw in worried consumers.

However, the budget constraints being imposed by the Government may see even larger increases.