Inflation sticks at 3.1% with households paying the price

Published on Wednesday 15 September 2010 02:35

THE cost of living is continuing to rise well above target, as new figures yesterday revealed how consumers are being hit by the "stealthy enemy" of inflation.

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Inflation stayed at 3.1 per cent in August, the same as the previous month, and well above the 2 per cent target set by the Bank of England.

High street shoppers and air passengers were among those most harshly stung by sharp rises in prices with only a fall in fuel costs preventing a increase in inflation.

The rise comes with many households facing minimal or non-existent pay rises, ensuring their spending power is being cut month by month.

The new figures, which were above analysts' expectations, led to fresh speculation in the City yesterday that the Bank of England may have to bring forward the date when it starts to increase interest rates from their current historic lows.

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The Bank now faces an increasingly tough choice between keeping the price of money low in order to stimulate the economy, and stopping inflation from getting too high.

The highest increase in costs was in air travel, as fares shot up by 16 per cent in August. Prices tend to increase over the course of the month, as airlines seek to cash in on higher demand, but the rise last month was the largest ever recorded.

In addition, clothes stores passed the rocketing cost of cotton on to consumers, a rise largely blamed on the floods in Pakistan and China which have ensured supply is far short of demand.

Cotton prices are up 54 per cent year on year, and high street stores such as Next have recently warned that prices may increase by a further 11 per cent in 2011.

Both Debenhams and Primark have also warned that High street shoppers face higher costs over the coming year, due to the rising price of cotton combined with the weak pound.

The other key pressure on inflation was in food costs, with bread, vegetables and cereal costs rising at their highest summer levels since 2008.Costs are expected to rise still further over coming months, after Russia - a major exporter of grain - extended a ban on exports following a recent drought.

Bank of England governor Mervyn King now looks set to have to write another letter to Chancellor George Osborne later this year explaining why inflation remains above target.

The new figures will add strength to the concerns from Bank of England hawk, Andrew Sentance, who is the only member of the Bank's Monetary Policy Committee who has so far backed an increase in interest rates to offset inflation.

Some analysts are warning that the blame for inflation cannot all be laid at external influences, saying that underlying domestic costs are also building up pressures.

However, other City figures said last night that there would be no panicking in the Bank, which still expected inflation to come back under target next month.

Howard Archer, an economist for IHS Global Insight, said: "While the Bank of England is likely to be mildly disappointed with the August inflation data, the figures are unlikely to significantly change the bank's view that underlying inflationary pressures will gradually wane over the coming months, and consumer price inflation is still likely to fall below its 2 per cent target rate in 2012."