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| Consumer inflation 'could top 4%' | Consumer inflation 'could top 4%' |
| (20 minutes later) | |
| Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. | Rising food and energy prices could push UK consumer inflation above 4% this year, the governor of the Bank of England has warned. |
| He was speaking after the Office for National Statistics (ONS) said the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April. | He was speaking after the Office for National Statistics (ONS) said the Consumer Prices Index (CPI) rose by 3.3% in May, up from 3% in April. |
| This is the fastest rate since the CPI measure began in 1997, the ONS said. | This is the fastest rate since the CPI measure began in 1997, the ONS said. |
| The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month. | The wider Retail Prices Index measure of inflation rose to 4.3% from 4.2% the previous month. |
| The biggest contributor to consumer inflation was the rising price of food and non-alcoholic drinks, the ONS said. | The biggest contributor to consumer inflation was the rising price of food and non-alcoholic drinks, the ONS said. |
| class="lp" href="http://news.bbc.co.uk/1/hi/talking_point/default.stm">HAVE YOUR SAYLike everyone else, I'm feeling the squeeze everywhereAndrew, Newcastle class="" href="http://newsforums.bbc.co.uk/nol/thread.jspa?forumID=4951">Send us your comments | |
| This was mainly due to the increasing cost of meat products, particularly bacon, and vegetables. | This was mainly due to the increasing cost of meat products, particularly bacon, and vegetables. |
| Increasing household energy bills were also a significant factor, along with the rising cost of books, stationery and foreign holidays. However, this rise in the cost of leisure and recreation was offset by a fall in the price of DVDs, according to the ONS. | Increasing household energy bills were also a significant factor, along with the rising cost of books, stationery and foreign holidays. However, this rise in the cost of leisure and recreation was offset by a fall in the price of DVDs, according to the ONS. |
| Further rises? | Further rises? |
| If inflation rises more than one percentage point above the government's 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices. | If inflation rises more than one percentage point above the government's 2% target, the Bank of England governor must write a letter to the government to explain what action it is taking to control consumer prices. |
| In his letter to the chancellor, Mervyn King blamed sharp rises in the prices of food and energy for the increase in the rate of inflation. | In his letter to the chancellor, Mervyn King blamed sharp rises in the prices of food and energy for the increase in the rate of inflation. |
| He also suggested that prices will rise at a faster rate in the coming months. To return now to inflationary pay settlements would undermine rather than raise people's living standards Chancellor Alistair Darling href="/1/hi/uk_politics/7458889.stm">Ministers give up 2008 pay rises class="" href="/1/hi/talking_point/7453853.stm">Are you feeling the credit crunch? class="" href="/1/hi/business/7458829.stm">Where next for inflation? | |
| "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%," Mr King told the chancellor. | "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%," Mr King told the chancellor. |
| "I must stress however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices," he said. | "I must stress however, that there are considerable uncertainties, in both directions, around this, and any such projection is particularly sensitive to changes in domestic gas and electricity prices," he said. |
| The Bank governor Mervyn King has had to write such a letter to the chancellor only once before, when inflation hit 3.1% in April 2007. | The Bank governor Mervyn King has had to write such a letter to the chancellor only once before, when inflation hit 3.1% in April 2007. |
| The governor said that the rate of inflation should peak towards the end of this year, as long as there were no "unexpected increases in oil and commodity prices". | The governor said that the rate of inflation should peak towards the end of this year, as long as there were no "unexpected increases in oil and commodity prices". |
| Should the UK avoid severe external shocks, then the rate of inflation will begin to fall back towards the 2% target next year, Mr King said. | Should the UK avoid severe external shocks, then the rate of inflation will begin to fall back towards the 2% target next year, Mr King said. |
| In reply, Chancellor Alistair Darling called for "restraint" in pay rises awarded in both the public and private sector. | In reply, Chancellor Alistair Darling called for "restraint" in pay rises awarded in both the public and private sector. |
| "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 increasing prices," the chancellor said. | "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 increasing prices," the chancellor said. |
| Economic slowdown | Economic slowdown |
| The higher than expected rise in consumer price inflation has transformed expectations for interest rates, according to the BBC's Economics Editor, Hugh Pym. | The higher than expected rise in consumer price inflation has transformed expectations for interest rates, according to the BBC's Economics Editor, Hugh Pym. |
| EXCHANGE OF LETTERS As things stand, inflation is likely to rise sharply in the second half of the year, to above 4% Mervyn King, governor of the Bank of England class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/08_06_17_king_letter.pdf">Mervyn King's letter to the chancellor class="" href="http://news.bbc.co.uk/1/shared/bsp/hi/pdfs/08_06_17_darling_letter.pdf">Chancellor Alistair Darling's reply Most computers will open this document automatically, but you may need Adobe Reader href="http://www.adobe.com/products/acrobat/readstep2.html">Download the reader here | |
| Confident talk of two or more cuts in borrowing costs from the present level of 5% has been replaced by forecasts of unchanged or even higher rates in the months ahead, our editor says. | Confident talk of two or more cuts in borrowing costs from the present level of 5% has been replaced by forecasts of unchanged or even higher rates in the months ahead, our editor says. |
| Mr King and his colleagues are unlikely to cut interest rates further until they are convinced that the inflationary threat has passed - despite pleas from those struggling in the housing market. | Mr King and his colleagues are unlikely to cut interest rates further until they are convinced that the inflationary threat has passed - despite pleas from those struggling in the housing market. |
| However, analysts warn that raising interest rates to curb inflation could dampen an economy already dented by slowing growth and the weakening housing market. | However, analysts warn that raising interest rates to curb inflation could dampen an economy already dented by slowing growth and the weakening housing market. |
| "The key factor [deciding the direction of interest rates] will be whether increased inflationary expectations feed through into greater wage demands and second round effects â at the moment average earnings growth is stable, but the MPC will be watching it closely through 2008," said economist Charles Davis from the Centre for Economics and Business Research. | "The key factor [deciding the direction of interest rates] will be whether increased inflationary expectations feed through into greater wage demands and second round effects â at the moment average earnings growth is stable, but the MPC will be watching it closely through 2008," said economist Charles Davis from the Centre for Economics and Business Research. |
| Passed on | Passed on |
| Consumers and companies are already feeling the effects of higher energy and food bills. | Consumers and companies are already feeling the effects of higher energy and food bills. |
| Oil prices have nearly doubled over the past year and on Monday the price hit a fresh high of almost $140 in New York. | Oil prices have nearly doubled over the past year and on Monday the price hit a fresh high of almost $140 in New York. |
| That in turn has pushed up the cost of petrol and diesel, prompting many people to rein in their spending in other areas. | That in turn has pushed up the cost of petrol and diesel, prompting many people to rein in their spending in other areas. |
| At the same time, many food prices have surged to record levels because of increased demand and inclement weather in key producer nations. | At the same time, many food prices have surged to record levels because of increased demand and inclement weather in key producer nations. |