KUALA LUMPUR - MALAYSIA'S inflation rate jumped to a 26-year high of 8.5 per cent in August, driven by the escalating cost of food and fuel, according to official data released on Wednesday.

'The result was slightly higher than e pected but the central Bank Negara would not raise interest rates to ensure growth,' said Mr Wan Suhaimi Saidi, an economist with Kenanga Investment Bank.

'It is slightly above my expectation. I was looking at 8.4 per cent. I don't think the government will increase the key interest rates. It will be maintained at 3.50 per cent till the year-end to support growth,' he told AFP.

The Department of Statistics revised downwards the inflation figure for July to 8.3 per cent.

It said the cost of food and non-alcoholic drinks rose 11.7 per cent in August compared to a year ago. The high inflation is already hurting consumers with many Malaysians cutting down on their food bill.

'The increase (in inflation for August) was shown in the selected main groups, namely food and non-alcoholic,' it said in a statement.

The August data showed escalating prices in most categories, including transport which jumped 21.8 per cent, and restaurants and hotels which rose 6.5 per cent.

Malaysia's government hiked the fuel price by 41 per cent in June, in a move to rein in the ballooning cost of subsidies but it has indicated prices could be lowered soon.

High inflation was one of the factors that led to an unprecedented humiliation at March general elections for the ruling coalition, which lost five states and a third of parliamentary seats.

Bank Negara has said it expects inflation to moderate in the second half of 2008 as economic growth is likely to slow down.