HOUSEHOLDS should be braced for further surges in the cost of living after inflation hit the highest level since Labour came to power in 1997, the Bank of England warned today.
Governor Mervyn King said inflation could top 4% – more than double his 2% target – later this year as record oil prices and the prospect of higher gas and electricity bills hits home.
The warning came in an open letter to Chancellor Alistair Darl
ing forced by the Consumer Prices Index (CPI) surging to 3.3% in May – the highest since the measure was first reported in January 1997.
Mr Darling said the Government was working on a "genuinely global" response to soaring food and oil costs but was determined to keep a lid on inflationary pay deals.
"To return now to inflationary pay settlements would undermine rather than raise people's living standards with a damaging circle of wage increases eroded by steadily rising prices," the Chancellor said.
Interest rates have been cut three times to 5% since December as the economy slowed, but spiralling oil and commodity costs have left CPI above target and tied the hands of the Bank's Monetary Policy Committee (MPC).
The Governor said today that the course of rates was "uncertain" – although some in the City have tipped borrowing costs to go up to tackle the inflation spike.
But Mr King hinted rate rises were not on the cards as an attempt to bring inflation back down in the next 12 months would cause "unnecessary volatility in output and employment".
Although further hikes in oil could derail expectations, there were "good reasons" to believe the spike was temporary as the UK was not seeing a rise in prices and wages caused by more money being spent in the economy. The MPC would continue to take a two year view of inflation, Mr King added.
Investec chief economist Philip Shaw said: "The Governor managed to soothe markets' worst fears, namely that the MPC could be willing to risk bringing the economy down sharply in order to drive inflation down rapidly.
"Although Mr King did not rule out the possibility of tightening policy, we maintain that the MPC will not have to raise rates and that the Bank rate will remain at 5% for the remainder of 2008."
The full article contains 389 words and appears in The Scotsman newspaper.
