Consumer Inflation Has 'Risen Sharply', Says Bank Of England

The Governor of the Bank of England has written a letter of explanation to the Chancellor over the rising inflation figure.

The inflation rate has soared to more than 3.3% - well above the Government's target of 2% - in figures released today.

According to the Office for National Statistics, in the year to May, the Consumer Price Index (CPI) rose by 3.3%, up from 3.0% in April.

In the same time period, the Retail Prices Index (RPI) rose by 4.3%, up from 4.2% in April.

Some financial experts have predicted that the Consumer Price Index (CPI) will rise to 3.2% in May.

The UK Monetary Policy Committee (MPC), which sets the Bank of England's rates has already cut interest rates three times since December in a vain attempt to slow the economy down.

The Bank of England Governor Mervyn King has cited soaring cost of fuel as one of the main culprits.

"Inflation has risen sharply this year, from 2.1% in December to 3.3% in May. That rise can be accounted for by large and, until recently, unanticipated increases in the prices of food, fuel, gas and electricity," Mr King said in his letter to the Chancellor Alistair Darling.

Mr King said there are "good reasons" to expect the period of above-target inflation "to be temporary" as there is a change in commodity, energy and import prices "relative" to the prices of other goods and services.

However, Mr King warned that commodity prices "will rise further in the coming months" but that inflation should peak around the end of the year and begin to fall back towards the 2% target.

"The Monetary Policy Committee remains determined to set interest rates at the level required to bring inflation back to the 2% target," he concluded.

In response, Mr Darling said that "the MPC's forward-looking approach has been a cornerstone of economic policy since 1997".

Mr Darling agreed with Mr King that "sharp price changes reflect developments in the global balance of demand and supply for food and energy".

"The Government will continue to support the MPC in the forward-looking decisions it takes, consistent with the Government's monetary policy objectives s set out in the remit, namely to maintain price stability and, subject to that, to support the economic policy of the Government, including its objectives for growth and employment," concluded Mr Darling.

The Chancellor advised Mr King that the next open letter would not be required until September if the August inflation figure is above 3%.

This is the second time that Mr King will have had to write such a letter, the first being in April 2007.

Oil prices have almost doubled over the past year, earlier this week oil sky rocketed to almost $140 a barrel in New York – which is a 40% rise this year.

Wholesale gas prices are up by about 160% in the past year and UK household energy bill have risen by about 10%.

The oil price has had a domino effect on petrol and diesel which is affecting consumer's spending in other areas.

(DS)