Bank in new inflation warning

Inflation is set to hit a peak of five per cent this year and will still be above its two per cent target rate through 2012, the Bank of England has warned.

The latest quarterly inflation report has warned consumers – including those struggling to balance debt repayments with a rising cost of living – that there will be more pain ahead.

It stated the Consumer Prices Index (CPI) rate “is likely to rise further this year and is more likely than not to remain above the target throughout 2012”.

The Bank added that the Monetary Policy Committee (MPC) consists of members who at present have very different views about the longer-term outlook for inflation, although the predictions cancel each other out “on balance”, meaning a CPI rate above or below two per cent after 2012 are as likely as each other.

Higher domestic fuel prices were cited as one factor likely to push up inflation over the next few months, which could add more pressure to those with debt.

However, the report may offer some comfort for those concerned about their mortgage payments and the threat of repossession if these rise.

While the prospect of a five per cent CPI rate may imply a greater likelihood of a rate hike, the more ambiguous longer-term outlook might enable a majority of the MPC to maintain the 0.5 per cent base rate against those members seeking an increase.

The economic growth forecast for this year has been reduced from two per cent to 1.75 per cent.

This revision follows two others this week, with Confederation of British Industry announcing it had cut its 2011 forecast for the increase in gross domestic product from 1.8 per cent to 1.7 per cent.

By James Francis