British manufacturers hiked prices in June at the fastest annual pace in at least two decades to combat record cost inflation.

Figures released today highlighted the growing threat of 'stagflation' - rising inflation and an economic slow-down. They also underline the dilemma facing the Bank of England as the economy slows but prices jump.

"Ongoing elevated inflationary pressures continue to constrain the Bank of England's ability to deliver any time soon the interest rate cuts that the economy so badly needs," said Howard Archer, an economist at Global Insight.

The Office for National Statistics said that output prices - a measure of how much manufacturers charge for their goods - rose 0.9 per cent on the month in June, taking the annual rate up to 10 per cent - the highest since the data series began in 1986.

It compares to a reading of 2.5 per cent this time last year.

More than half June's rise was attributed to soaring food and petrol costs - up 11.8% and 34.2% respectively over the year and both record highs in the series.

Input prices - those faced by manufacturers - rose a seasonally adjusted 2.1 per cent, taking the annual rate up to 30 per cent -also the highest since 1986 as food and fuel prices rocket.

"Another poor set of producer prices data," said Geoffrey Dicks, an economist at RBS. "With oil prices hitting new highs, we are still not at the peak in terms of the annual inflation rate."

Fears of a marked slowdown in the economy and a possible housing market crash have led many analysts to argue the Bank will have to lower interest rates eventually, but those cuts will be hard to justify with inflation pressures building so fast.

Figures due to be published tomorrow are likely to show another rise in consumer price inflation, already running at the highest rate in more than a decade at 3.3 per cent.