US consumer prices rose by 0.8 per cent in July, twice as fast as expected, damping hopes that falling crude oil prices and the slowing consumer demand would rapidly ease inflationary pressures.

The surprise jump in the consumer price index on a monthly basis was accompanied by an annual increase of 5.6 per cent, which was more than forecast and the largest jump since 1991.

Meanwhile, core prices – excluding food and energy costs – rose by 0.3 per cent, which was also higher than expected, amid sharp increases in the prices of apparel, tobacco and public transportation.

The soaring consumer price index highlights the dilemma facing the Federal Reserve as its policymakers weigh the risks of the rising cost of living against increasing unemployment, a weak consumer and stress in the financial services industry. The Fed has maintained interest rates steady at 2 per cent over the past two meetings to set monetary policy as it has balanced those dangers.

Speculation had been building that the recent drop in the price of crude oil might alleviate inflationary pressures, making it less likely that the Fed would have to raise interest rates early to tackle rising prices. But Thursday’s CPI report signals that inflation is likely to remain a main source of concern for the Fed.

Economists were on average expecting a 0.4 per cent rise in the July headline index, after it gained 1.1 per cent in June. Energy prices rose by 4 per cent in July, after increasing by 6.6 per cent in June, while food prices rose at a rate of 0.9 per cent last month, which was faster than the 0.8 per cent rate in June.