Bank of England Governor Mervyn King has warned that inflation could rise above 4% this year as oil and energy prices soar. In an open letter to the Chancellor after official inflation hit 3.3%, Mr King said he had revised previous forecasts upwards due to a 15% rise in oil prices during the past month and the prospect of higher gas and electricity bills.
Mr King's latest forecast puts the Consumer Prices Index at more than double the Bank's 2% target and raises fears of imminent rate rises. Chancellor Alistair Darling replied that he and the Prime Minister were "working across a range of international fora" to tackle price rises and added that inflation was moderate compared with the 1970s and 1980s. The Governor is forced to write a letter if inflation moves more than 1% above or below the Bank's target. Mr King added that inflation should peak around the end of the year and begin to fall back towards its target "in the absence of further unexpected increases in oil and commodity prices". The Governor said that the course of interest rates needed to meet the 2% target was "uncertain". He added that the Bank's monetary policy committee (MPC) would make month-by-month judgments on the course of borrowing costs. The MPC has faced a balancing act between cutting rates too sharply and adding to inflation risks and keeping rates too high and risking a sharp slowdown of the economy. Soaring fuel and food prices pushed inflation above 3% in May to its highest reading since records began more than 11 years ago. The Consumer Price Index rose by 0.3 percentage points to 3.3% during May - the highest reading since the measure was first reported in January 1997. Previous comparable annual inflation readings were last as high in July 1992, the Office for National Statistics said.