Bill Jamieson: Huge blow to Osborne – but we face an even bigger threat

These may have grabbed the headlines, with increases of 9.9 per cent and 18.3 per cent respectively. But almost all items in household budgets have been driven higher. Transport costs are up 12.8 per cent on a year ago. Housing and household services are up 8.6 per cent. And food – exempt from VAT – is 6 per cent more expensive.

While lower-income families will be particularly hard hit by the inflation squeeze – the headline Retail Prices Index is up 5.6 per cent – savers are also being pummelled. To beat inflation, a basic rate taxpayer at 20 per cent needs to find a savings account paying 6.5 per cent. A higher-rate taxpayer at 40 per cent needs a return of at least 8.67 per cent. Millions of pensioners relying on a nest-egg to see them through retirement are victims of a slow, silent financial slaughter.

And for Chancellor George Osborne, the news could scarcely be worse. Back in March, the Budget the Office for Budget Responsibility (OBR) forecast inflation would be 4.3 per cent in September – the month used to fix increases in pensions and social security benefits for 2012-13. The higher rate is reckoned by the Institute for Public Policy Research to present the Chancellor with a pensions and social security bill for next year some £1.2 billion higher than the OBR forecast – putting the deficit cut targets at even greater risk.

For five years in a row, inflation has breached the 2 per cent target set for Bank of England’s monetary policy committee. And the Bank’s inflation forecasting record has been abysmal. Back in August 2010, Sir Mervyn King insisted inflation would be below the 2 per cent target in the course of this year. Instead, it has climbed even higher, to a level not seen since 1992. For almost three years, the Bank has fixated on the risks of deflation in the aftermath of the financial crisis and has systematically under-estimated inflation, allowing one overshoot after another as interest rates were slashed to an ultra-low 0.5 per cent.

Two questions now confront the Bank. Does anyone believe its inflation forecasting any more? And, given the state we’re in, does this inflation overshoot really matter in policy terms?

In a speech last night, Sir Mervyn said inflation was now “likely to be at, or close to, the peak, and we expect inflation now to start to fall back, as it did in the months following the peak in inflation in September 2008”.

This time round, most commentators believe he is right, though some think a fall back to 2 per cent unlikely. More worrying for us all is that by far the bigger threat we face is a relapse back into recession – and an economy stuck in the doldrums as far ahead as we can see.