HOMEOWNERS were left with little hope of a cut in mortgage rates yesterday, after the Bank of England said inflation would remain well above target for at least a year.
The official rate jumped last month from 3 per cent to 3.3 per cent – the highest in more than ten years – and the Bank warned that it would breach 4 per cent by the end of the year.
The Prime Minister, Gordon Brown, announced that ministers would forego a 1.5 per cent rise in salaries to set an example on wage restraint. However, they will all qualify for the normal increase in their MP's wage.
The Office for National Statistics published figures showing the consumer price index (CPI) hit 3.3 per cent in May, confirming the higher prices experienced by millions of shoppers and motorists.
The rising cost of food, fuel, gas and electricity are responsible for the vast bulk of the 1.2-point increase in inflation since last December's 2.1 per cent figure.
Having missed the government's CPI target of 2 per cent in May, Mervyn King, the Bank's governor, was required to write an open letter to Alistair Darling, the Chancellor, explaining what had gone wrong and how he planned to bring inflation back under control.
In his letter, Mr King said: "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4 per cent."
But he stressed there were "considerable uncertainties, in both directions", as inflation was particularly sensitive to changes in gas and electricity prices.
He said there were "good reasons" to expect the higher inflation rate to be temporary, because it was not being fuelled by excessive consumer spending.
However, he said the Bank's nine-member monetary policy committee was not ready to alter the base lending rate – on which many mortgages are based – to tackle inflation, as this would inject "unnecessary volatility" into the economy.
Mr King wrote: "CPI inflation is likely to remain markedly above the target until well into 2009. I expect, therefore, that this will be the first of a sequence of open letters over the next year or so."
The Bank of England base lending rate is currently 5 per cent, having been cut three times since December in an effort to revitalise the stalling housing market and kick-start the economy.
One finance expert, James Knightley, of ING Bank, said: "With inflation likely to continue rising in the near term, we doubt the Bank will be keen to cut rates soon."
The prediction of inflation rising to more than 4 per cent sparked fears of a return to the "stagflation" of the 1970s – a combination of stagnating growth and rising inflation.
But Graeme Leach, the chief economist at the Institute of Directors, told a committee of MPs yesterday that the problem was better described as "stickyflation", as inflation was not in double figures.
Mr Darling said Britain was no longer dealing with "home-grown problems" in tackling inflation, and he pointed to a 40 per cent rise in world food prices and a doubling in the price of oil – currently about $140 a barrel.
In his response to Mr King, the Chancellor said that, despite the "price shocks" in oil and food, the rise in inflation "has been extremely moderate, compared with the behaviour of the economy in the 1970s and 1980s".
George Osborne, the Tory shadow chancellor, said Gordon Brown's policies in his decade as Chancellor had left the UK "ill-prepared to face the double evil of rising inflation and falling growth".
He added: "Today we got official confirmation of the rising cost of living."
Liz Cameron, the chief executive of Scottish Chambers of Commerce, called on the Bank to "stand firm" against demands to increase lending rates to drive down inflation.
She said: "For Scottish businesses already facing significant cost increases through energy bills and raw materials, a rise in interest rates would do nothing to alleviate these pressures, and indeed may make it more likely that increased costs would be passed on to customers and consumers."
Economic worries a non-runner as high society heads for AscotINFLATION may be rising, but the hemlines of dresses at Royal Ascot were lower yesterday as British high society attempted to brush aside the country's economic woes with a day at the races.
Hat's the way to do it – fashion was the clear favourite among this group of women from Gloucestershire as they came under starter's orders for the start of Royal Ascot yesterday
Woman attending the first day of a week of races at the racecourse in Berkshire were reminded that its dress code rendered mini skirts unacceptable – also off-limits were off-the-shoulder dresses, "spaghetti straps" and streaky fake tans.
But in a sign that the downturn in the economy was not tightening everyone's purse strings, some 170,000 bottles of champagne were expected to be consumed, along with 10,000 lobsters, 5,000 oysters and 18,000 punnets of strawberries.
Ascot has long been a mix of top-hatted aristocrats and questionably-dressed women, many from more humble backgrounds, who enjoy parading in the company of the Royals. The Queen arrives each day in a horse-drawn carriage in advance of the first race. Women heading for the Royal enclosure have been told midriffs must be covered and "trouser suits must be full length and of matching material and colour". Men are required to wear morning coats with a top hat.
Ascot is the jewel in the crown for socialites who, recession or no recession, take in the races before heading to Wimbledon, Henley's rowing regatta and a night at the Glyndebourne opera. The jockey Frankie Dettori calls Ascot "the Olympics of racing".
Divorcees were once banned from the Royal enclosure and all ladies had to wear gloves.
In the 18th century, Queen Anne first realised Ascot's potential when riding through the forest near Windsor Castle. The course was opened in 1711 and her foresight is commemorated every year with the running of the Queen Anne Stakes.
Geordie Greig, the editor of Tatler, said: "Ascot is still a glorious event with some of the best racing, best dresses and best fun. It has a global reputation for great finery."
Some crumbs of comfort, but hard-hit public may be facing real inflation rate of up to 7.3%
ANALYSIS: Bill JamiesonKEEP the pen and notepaper handy: this will be the first in a string of highly uncomfortable letters that Mervyn King, the governor of the Bank of England, will have to write to Alistair Darling, the Chancellor, explaining why inflation on the official measure has risen so far above the 2 per cent target.
Yesterday's missive offered two crumbs of comfort. One was that, while inflation is set to climb to above 4 per cent later this year, the MPC is not seeking to bring it down sharply by rate rises that would result in "unnecessary volatility in output and employment". This was greeted with relief in financial markets, where a rate rise had been priced in.
The second crumb was that pay growth has remained moderate in the face of sharp rises in the prices of oil and foodstuffs. However, the public's expectations of future inflation are rising sharply. A key reason is that household bills are going up by more than the official measure.
Applying an Office of National Statistics measure for frequently purchased goods and services, this inflation rate rose from 5.9 per cent in April to 6.1 per cent in May. A measure based on the costs of necessary purchases – food, rent, utilities and transport – showed much stronger inflation than even the all-items RPI (4.3 per cent). Indeed, inflation on such a measure would have risen from 6.6 per cent in April to 7.3 per cent in May.
The danger is that, if high levels of inflation in frequently purchased items and necessities persist, inflation expectations will increase much further. All talk of bringing it back to the 2 per cent target will then lack credibility. The Bank governor is counting on a slowdown in the economy to ring out inflationary pressure over time. But it may not be until 2010 that inflation is back to 2 per cent.
The key problem with the CPI measure is that there is no housing component, with the result that there is no offsetting downward push from falling house prices to offset the rises in food and oil costs. This is why the all-items RPI showed only a modest rise last month, from 4.2 per cent to 4.3 per cent.
Ironically, it was the absence of a house-price component that enabled the MPC to bring down interest rates and keep them low while house prices boomed. Now, in a period of housing slump, with confidence being hit by tumbling prices and rising mortgage costs, the MPC is under pressure to raise rates to bring down externally generated inflation.
Ministers lose out on pay rise to set example to others
Gerri Peev THE Prime Minister has banned his Cabinet from taking ministerial pay rises to reflect the importance of public sector wage restraint at a time of rising inflation.
Gordon Brown told members of his government yesterday that their pay would be frozen for the year.
The recommended pay rise would have given Mr Brown an extra £1,900, while Cabinet ministers would have received £1,200 more and ministers up to £600.
Ministerial pay was meant to go up in line with senior civil servants, and they were due to get a 1.5 per cent pay rise in 2008-9. But Mr Brown has rejected this.
They will still, however, receive a pay rise in relation to their jobs as MPs.
Mr Brown said: "Given the importance of public sector pay restraint at a time of economic uncertainty, ministers will not be accepting any pay rise."
The government has also rejected a suggestion that MPs should have their pay linked to the three-month average public sector earnings index and receive a top-up payment of £650 for the next three years.
The recommendation was from Sir John Baker, the former head of the Senior Salaries Review Board, who had been commissioned by the Prime Minister to look into MPs' pay.
But Mr Brown, who is locked in a battle with public sector unions, would prefer to link MPs' pay to the average settlement for public sector workers. This would mean MPs' pay rises by a far more modest 2 per cent, compared with the 3.5 per cent Sir John had recommended.
But Sir John said forgoing a pay rise to appease the public was simply "storing up pain for the future" as MPs' pay falls further behind.
While £61,820 would seem generous to many public sector workers in their twenties, it would fail to attract "mid-career professionals", he said, and there was a danger that the calibre of candidates putting themselves forward to become MPs would drop.
MPs will vote on their pay on 3 July, probably for the last time, as the government is backing a move to automatically accept the recommendations of the Senior Salaries Review Board.
The full article contains 1862 words and appears in The Scotsman newspaper.
