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The annual inflation rate in the UK unexpectedly rose to 3.6% in June from 3.4% in May on higher transport prices, particularly fuel, in a troubling sign for policymakers at the Bank of England.

The consumer price index (CPI) has now reached its highest level in 18 months. It had been expected to remain unchanged from 3.4%, where it had stood for the previous two months.

The core rate, which excludes volatile food and energy costs, was also higher than expected, climbing to 3.7% from 3.5%, according to the Office for National Statistics (ONS).

The rising cost of motor fuels was the most significant contributor to the jump in CPI. Food inflation has increased for a third month in a row to its highest level in more than a year at 4.5%, the ONS said.

ONS acting chief economist Richard Heys said: “Inflation ticked up in June, driven mainly by motor fuel prices, which fell only slightly, compared with a much larger decrease at this time last year.

“Food price inflation has increased for the third consecutive month to its highest annual rate since February of last year. However, it remains well below the peak seen in early 2023.”

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Bread, cereals, and cake, along with meat, and milk, cheese and eggs (mainly cheddar cheese) went up in price. These were partially offset by small downward effects from chocolate products, as well as fruit juice.

The Bank of England expects inflation, which has accelerated since April due to higher energy prices, to peak at 3.7% before falling back to its 2% target.

The Monetary Policy Committee has cut interest rates twice this year, from 4.75% to 4.25%. Markets are betting on another quarter-point cut next month.

Richard Flax, chief investment officer at MoneyFarm, said of the ONS data: "This puts the BoE in a difficult spot. On one hand, the persistence of services inflation and strong wage growth argue against premature easing. On the other, weakening growth and a softening labour market make the case for caution against holding rates too high for too long.

Markets still expect the BoE to begin cutting rates later this year, but the path ahead is far from straightforward. Today’s data reinforces that while inflation isn't reaccelerating, the drag from tight policy is becoming harder to ignore. The question is — when do concerns over weakening job market and anaemic growth trump inflation?”

Governor Andrew Bailey had indicated this week that policymakers might look past inflation data when he said the Bank would lower borrowing costs if they begin to see signs of weakness in the jobs market.

However, Andrew Sentance, who sat on the Monetary Policy Committee from 2006 to 2011, said it would be “irresponsible” for it to cut interest rates after the jump in inflation.

Rachel Reeves said she was “determined” to put more money in people’s pockets after official figures showed inflation jumped unexpectedly last month.

The chancellor said: “I know working people are still struggling with the cost of living.

“That is why we have already taken action by increasing the national minimum wage for 3 million workers, rolling out free breakfast clubs in every primary school and extending the £3 bus fare cap.

“But there is more to do and I’m determined we deliver on our Plan for Change to put more money into people’s pockets.”

The rise in inflation comes as Labour faces intense scrutiny over its economic management after two months of negative growth and with speculation mounting over tax rises.

Lindsay James, investment strategist at Quilter, said: “Despite last night’s Mansion House speech and the desire to kickstart growth in the economy, Labour is left waking up to headlines of inflation rising again.

“It seems we are now seeing the effects of the rise in employer national insurance contributions feeding through into prices, along with increased shipping costs hitting too. Groceries, for example, have been higher in June as a result of those increased costs and a poor harvest, the third consecutive rise. Other sectors too are also seeing an increase in prices as we hit the summer months.

"Fuel prices aren’t falling as fast as they did last year, while clothing prices have also risen. Ultimately, consumers are going to be feeling the pinch once again when it comes to the cost of living."

The UK's inflation rate was the highest in the G7 group of advanced economies in June for the first time in more than a year, according to the Economics Observatory.