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15th February 2011, 21:08
Mervyn King, the Governor of the Bank of England, has warned that inflation could remain high for the next two to three years, leading to a substantial fall in many people's real incomes.
With the average worker's salary forecast to tick up by little more than 2 per cent a year, unable to match the escalating the cost of living, millions of families will feel significantly worse off, experts warned.
Mr King's warning came as official data revealed that inflation, as measured by the Consumer Prices Index, climbed from 3.7 per cent in December last year to 4 per cent in January, the highest level for over two years.
The surging price of oil, petrol and the increase in the rate of VAT, which pushed up the price of alcohol and restaurant meals, were the main reasons for the jump.
The Retail Prices Index, a measure of inflation that many believe more accurately reflects the true cost of living because it contains housing costs, increased from 4.8 per cent to 5.1 per cent.
This is now the 13th consecutive month that the CPI figure has been above the Treasury target of 2 per cent, prompting Mr King to write a letter of explanation to George Osborne, the Chancellor.
In it he admitted that the outlook was increasingly uncertain and that the Bank's Monetary Policy Committee, which sets interest rates, was strongly divided as to whether to lift rates from their record low level of 0.5 per cent, where they have been for nearly two years.
The immediate outlook, however, he warned, was one which would see a continuing rise in prices, because of the rising price of oil, wheat, copper and other commodities on the global markets, sending up the price of everything from a cut of meat to a tank of petrol.
Mr King said: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices."
The Office for Budget Responsibility has forecast that average earnings this year will increase by just 2.2 per cent, followed by an increase of 2.4 per cent in 2012, raising the prospect that workers will suffer from effective wage cuts for the next two years.
Ann Robinson, the director of Consumer Policy at uSwitch.com, a price comparison site, said: “Consumers are facing a perfect storm that could see household finances knocked for six this year. When salaries fail to keep up with inflation it spells misery for consumers. These figures could be a cruel and costly combination for households, many of whom are already struggling to stay afloat in these stormy economic times."
Many households have already felt the full effects of inflation when they come to fill up their cars at the petrol pumps, with the price of petrol hitting a fresh high almost every day in January, because of the rising price of oil and higher fuel duty.
Beer, too, has shot higher in price, with the average pint of lager climbing the £3 barrier for the first time. Publicans warned it would increase even more after the Budget next month when an inflation-busting duty increase is expected to add a further 10p to the price for pint.
Rising levels of inflation puts mounting pressure on the MPC to act, even though the 4 per cent CPI figure was less high than many economists feared.
Hetal Mehta, an economist at Daiwa Capital Markets, said: “It will make the Bank of England very uncomfortable and they’ll really be feeling the heat.”
However, in his letter, Mr King said that he did "not wish to conceal that there are real differences of view" within the MPC.
Source: http://www.telegraph.co.uk/finance/economics/8325943/Mervyn-King-warns-of-inflation-for-next-three-years.html
With the average worker's salary forecast to tick up by little more than 2 per cent a year, unable to match the escalating the cost of living, millions of families will feel significantly worse off, experts warned.
Mr King's warning came as official data revealed that inflation, as measured by the Consumer Prices Index, climbed from 3.7 per cent in December last year to 4 per cent in January, the highest level for over two years.
The surging price of oil, petrol and the increase in the rate of VAT, which pushed up the price of alcohol and restaurant meals, were the main reasons for the jump.
The Retail Prices Index, a measure of inflation that many believe more accurately reflects the true cost of living because it contains housing costs, increased from 4.8 per cent to 5.1 per cent.
This is now the 13th consecutive month that the CPI figure has been above the Treasury target of 2 per cent, prompting Mr King to write a letter of explanation to George Osborne, the Chancellor.
In it he admitted that the outlook was increasingly uncertain and that the Bank's Monetary Policy Committee, which sets interest rates, was strongly divided as to whether to lift rates from their record low level of 0.5 per cent, where they have been for nearly two years.
The immediate outlook, however, he warned, was one which would see a continuing rise in prices, because of the rising price of oil, wheat, copper and other commodities on the global markets, sending up the price of everything from a cut of meat to a tank of petrol.
Mr King said: "Inflation is likely to continue to pick up to somewhere between 4 per cent and 5 per cent over the next few months, appreciably higher than when I last wrote to you. That primarily reflects further pass through from recent increases in world commodity and energy prices."
The Office for Budget Responsibility has forecast that average earnings this year will increase by just 2.2 per cent, followed by an increase of 2.4 per cent in 2012, raising the prospect that workers will suffer from effective wage cuts for the next two years.
Ann Robinson, the director of Consumer Policy at uSwitch.com, a price comparison site, said: “Consumers are facing a perfect storm that could see household finances knocked for six this year. When salaries fail to keep up with inflation it spells misery for consumers. These figures could be a cruel and costly combination for households, many of whom are already struggling to stay afloat in these stormy economic times."
Many households have already felt the full effects of inflation when they come to fill up their cars at the petrol pumps, with the price of petrol hitting a fresh high almost every day in January, because of the rising price of oil and higher fuel duty.
Beer, too, has shot higher in price, with the average pint of lager climbing the £3 barrier for the first time. Publicans warned it would increase even more after the Budget next month when an inflation-busting duty increase is expected to add a further 10p to the price for pint.
Rising levels of inflation puts mounting pressure on the MPC to act, even though the 4 per cent CPI figure was less high than many economists feared.
Hetal Mehta, an economist at Daiwa Capital Markets, said: “It will make the Bank of England very uncomfortable and they’ll really be feeling the heat.”
However, in his letter, Mr King said that he did "not wish to conceal that there are real differences of view" within the MPC.
Source: http://www.telegraph.co.uk/finance/economics/8325943/Mervyn-King-warns-of-inflation-for-next-three-years.html