• By: FAZILA MIR

  3360

  
  With the rising cost of food and energy the Bank of England have warned that the UK consumer inflation rate could rise above 4% this year, this was warning was announced after the Office of National Statistics (ONS) said that the Consumer Prices Index (also known as CPI) rose by 3.3% last month and was up by 3% in April. This is the fastest rate recorded since the CPI started to measure the rises back in 1997.

  The Office of National Statistics also found that the wider retail prices index measure of inflation has also risen to 4.3% from 4.2% the previous month. It was found that the biggest contributor to the consumer inflation was the rising price of food and non-alcoholic drinks. This was due to the increasing cost of meat products such as bacon and also cost of vegetables.

  Another factor contributing to the consumers’ inflation is the increasing cost of house hold energy bills, along side 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.

  If inflation rises more than one percentage point above the government's 2% target, the governor of the Bank of England governor must write a letter to the chancellor in order to explain what course of action it will take in order to control consumer prices. In this letter to the chancellor, the Bank of England governor Mervyn King blamed the sharp rises in the prices of food and energy for the increase in the rate of inflation. As he said:

  "As things stand, inflation is likely to rise sharply in the second half of the year, to above 4%," "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 also added.

  This is the second time that the governor of the Bank of England has had to write to the chancellor only once before, when inflation hit 3.1% in April last year. 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 Bank of England’s governor believes that if the UK avoids severe external shocks, then the rate of inflation will begin to fall back towards the governments’ target of 2% by next year.

  In response to this the Chancellor Alistair Darling agrees with the governor of Bank of England’s assessment of the rising rate of inflation. However the two main opposition political parties have criticised the Labour Government for the rising cost of living. The Oppositional parties blame the years of borrowing for the sustaining of the economic boom of the past years, which have now resulted the government being unable to afford to make tax cuts or to offer financial incentives to help the consumers of the UK.

  The Shadow chancellor George Osborn said that:

  "Gordon Brown's economic reputation has gone bust. His years of boom and borrowing have left Britain ill prepared to face the double evil of rising inflation and falling growth."

  According to BBC news’s Economics Editor Hugh Pym, the higher than expected rise in consumer price inflation has transformed the expectations for interest rates, he also believes that the prices will continue to rise at a faster rate during the coming months.

  The confident talks of there being two or more cuts in borrowing costs from the present level of 5% have now been replaced with predictions of unchanged or even higher rates in the months ahead.

  It is a held belief among many that the governor of the Bank of England are unlikely to cut the interest rates further until they are convinced that the inflationary threat has passed, despite the pleas from those who struggling in the housing market.

  However, many analysts warn that the raising interest rates in order to curb inflation could dampen an economy already dented by a slowing growth and the weakening housing market. As the Economists from the Centre for Economics and Business Research said that:

  "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 – at the moment average earnings growth is stable.” but the MPC will be watching it closely through 2008."

  The chancellor has also called for "restraint" in pay rises awarded in both the public and private sector. As he 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 Prime Minister Gordon Brown also said that ministers would not accept a pay rise for this financial year.

  With all the increases in rates it has encouraged many people to rein in their spending in other areas.

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