A SURGE in house prices pushed the headline rate of inflation to 2.2 per cent last month from 2.1 per cent in June.

The bad news was tempered by encouraging trends in the high street. Though consumer spending has risen, boosting hopes of a return of the "feelgood" factor, retailers still show no sign of raising prices. Clothing and footwear sectors reported the sharpest fall in prices for any July sale for 40 years.

Such mixed signals mean the split between the Bank of England and the Chancellor of the Exchequer about the inflation outlook is likely to remain unresolved. Last week, the bank warned base rates would need to rise soon, as the government was likely to miss its inflation target.

This aims to bring underlying inflation, which excludes mortgage interest payments, to 2.5 per cent or below in two years.

But the Chancellor insists that the inflation target can still be met, even though he recently cut rates to 5.75 per cent. And though the City thinks that strong labour market data earlier this week could discourage him from cutting rates again. the Chancellor seems unlikely to raise them in the near future.

Meanwhile, the Treasury yesterday reiterated his optimism. It argued that yesterday's figures. and the low levels of manufacturing inflation revealed earlier this week. mean that the economy is firmly on course to hit the government's inflation target".

The Office for National Statistics said the rate of underlying inflation was 2.8 per cent in July, unchanged from the previous two months.

Measured overall, the all-items retail prices index stood at 152.4 per cent in July, with 100 representing the 1987 base.

The main factors which exerted upward pressure on inflation was a 0.4 per cent monthly increase in house prices.

Price increases in household services also accelerated, because of the rise in postal charges last month. The fall in telephone charges was also smaller than last July.

These increases, however, were offset by a large fall in seasonal food prices, owing to bumper crops of fruit and vegetables.

More significantly, the summer sales were marked by significant discounting. Household goods fell 1.5 per cent between June and July - a larger fall than last year when prices only dropped 1 per cent. Clothing and footwear fell 4.9 per cent - the largest fall in a July sale since 1953.