Food and fuel keep inflation high, with more rises to come

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The Independent Online

Plums were one of the few items exerting much downward pressure on inflation last month as a widespread increase in the price of food offset a seasonal drop in the cost of air travel, according to the Office for National Statistics (ONS).

The annual rate of inflation, measured by the consumer price index, stabilised at 4.5 per cent in May – which was identical to the rate in April, the ONS said. The older retail price index, which includes mortgage bills, was also unchanged, at 5.2 per cent.

As has been the case many times in the recent past, it is the cost of day-to-day essential items that has driven the cost of living higher. Petrol and diesel stand at an all-time high of 136.3p and 141.5p per litre respectively; food generally rose by 1.3 per cent between April and May alone, an annualised rate of increase of 15.6 per cent. Within that broad category, the price of fruit, meat – especially lamb – and poultry led the grocery charge.

There is little wiggle room for the supermarket shopper: margarine is up 20 per cent; sugar and jam is up 7.5 per cent; and mineral water is up 10.3 per cent on the year. An ONS spokesman could only point to plums as any source of relief from the carnage in the grocery aisles.

The latest data leaves inflation more than twice the official target of 2 per cent, and analysts say it remains well on course to hit 5 or 6 per cent by this August or September. Scottish Power is the first of what expected to be a long line of energy companies announcing steep rises for the autumn of between 10 and 15 per cent in their tariffs. Meanwhile, such factors as the drought, the E.coli outbreak in Europe and the trend towards higher commodity and food prices globally seem certain to leave inflation at levels that are tangibly affecting living standards.

But the Bank of England has predicted that inflation will get back to target in early 2013, as the VAT rise this January falls out of calculations next year and commodity prices fall back again, though Bank officials have always stressed the great uncertainty and volatility surrounding commodity-price movements.

The most recent "factory gate" data on input costs and business surveys also suggest a softening in the inflationary pressure. "Core" inflation – leaving aside volatile seasonal items such as food and fuel – was 3.3 per cent in May, down on the 3.7 per cent recorded in April.

High inflation seems set to intensify the squeeze on household budgets, already hit by tiny pay rises, tax hikes and benefit cuts. PricewaterhouseCoopers' chief economist, John Hawksworth, said: "Cash-strapped households have now experienced 18 continuous months of pain as inflation remains stubbornly above the Bank of England's 2 per cent target and well in excess of earnings growth. With domestic energy bills set to rise sharply, there is a real likelihood that CPI inflation could hit 5 per cent later this year.

"Today's announcement will maintain pressure on the Bank of England to raise interest rates from their record low of 0.5 per cent in a bid to keep inflation under control.

"But with the economic recovery still so fragile, we expect the Bank's Monetary Policy Committee to stick to its view that any increase in the interest rates can be put back until at least the winter of 2011."

Meanwhile, the Nationwide Building Society's Consumer Confidence Index for May 2011 showed a marked boost in hopes for the future, apparently on the back of the royal wedding. Despite recording one of the biggest monthly jumps ever, the index is still lower than last year.

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