Strong rises in the cost of toys and games pushed the inflation rate up more than expected in August, reinforcing expectations that interest rates will rise again before the end of the year.
Official data on Tuesday showed consumer prices rose 0.4 percent last month, lifting the annual rate to 2.5 percent the same as June and the joint highest since the Labour Party won power in 1997.
The pound jumped on the data and interest rate futures fell as dealers bet the Bank of England would raise borrowing costs again to keep price pressures in check.
The Bank of England raised interest rates in August for the first time in two years and most analysts think it will raise rates again, most likely in November, to steer inflation back to its two percent target.
With consumer price inflation moving back up in August and core inflation rising, another interest rate hike in November remains very much on the cards, said Howard Archer, chief UK economist at Global Insight.
Inflation has been above target for the last four months and the Bank has warned it is likely to rise even higher in coming months as higher university tuition fees and utility bills take effect.
BoE Governor Mervyn King said in August there was a 50/50 chance inflation would rise above 3 percent within six months, a scenario which would force him to write a letter to Chancellor Gordon Brown explaining why inflation was so far off target.
It is quite clear that UK inflation tendencies are moving in the wrong direction for the Bank of England, leaving the bias in UK rate policy definitely pointing higher, said David Brown, economist at Bear Stearns.
Rises in the cost of computer games and hobbies pushed inflation higher last month, offsetting the impact of easing petrol prices as world oil prices drifted off record highs hit in July.
While petrol prices eased, there was no let up for household bills with the price of electricity, gas and other fuels rising at an annual rate of 29.6 percent, the highest since the series began in 1997.
Moreover, worse may be to come with the latest round of utility bill hikes yet to feed through into the official data.
Powergen, Britain's second biggest energy supplier, put up gas and electricity prices at the end of August while British Gas owner Centrica announced bill increases to take effect from early September.
Retail price inflation (RPI) on which most pay deals are based picked up in line with expectations to 3.4 percent. That was the highest since December 2004.