Fears of rise in unemployment as inflation surges again

Inflation surged in June to almost double the Bank of England's target, intensifying concerns that the Bank will be constrained in cutting interest rates to shore up the economy.

Annual consumer price inflation jumped more than expected to 3.8 per cent from 3.3 per cent in May, Office for National Statistics figures showed yesterday. The rate of increase was the fastest since the Bank gained independence for setting rates in 1997, and was the second month in a row that the figure exceeded the 3 per cent upper limit.

Sterling hit a three-and-a-half-month high of $2.0153 against the US dollar as markets bet against near-term interest rate cuts by the Monetary Policy Committee.

The grim inflation figure came as a member of the MPC warned of a squeeze on living standards and rising unemployment as the MPC targets rising prices as its main policy concern. "Inflation is being pushed up in the short term and it will take time to get it back under control. That will require a squeeze on spending and incomes in the UK and other economies, with consequences for economic growth and employment in the short term," Dr Andrew Sentance said in a speech.

"But the real challenge is to maintain the conditions of price stability which will support growth and employment over the long term." To do so, national monetary authorities would have to remain vigilant and not be distracted by short-term global cost pressures, he added.

Inflation is being driven higher by rocketing energy and food prices as demand from Asia and other emerging markets increases. Dr Sentance said broad-based demand was at the heart of the increases, not speculation, and that upward price pressure could continue for some time.

The Bank is grappling with the twin threats of inflation and an economic slowdown that threatens to tip over into recession. While commodity prices surge, the cost of goods on the high street is slumping as retailers slash prices to lure cash-strapped shoppers to their stores. In June, clothing and footwear stores had a deflationary impact as they cut prices to less than they were a year ago in a bid to tempt hard-up shoppers.

The ONS said prices were 7.5 per cent lower than a year ago, with widespread discounts across mens, women's and children's clothing as consumers hit by higher food and energy costs reined in spending on non-essential items.

However, retail sales fell 0.4 per cent in June from a year earlier, according to the latest British Retail Consortium survey.