Inflation rate set to rise

The pressure on already-stretched household budgets will be underlined tomorrow when official figures show another increase in the rate of inflation.

The consumer prices index rate of inflation is set to show a rise to around 4.4% in July - more than twice the Bank of England's 2% target - after a short-lived decline in the rate to 4.2% in June's figures.

The figures will be closely watched by rail travellers as July's Retail Price Index (RPI) number, which unlike CPI also includes housing costs, is the basis on which rail fares for next year are based.

Sir Mervyn King will be forced to write his seventh successive letter to Chancellor George Osborne, and his 12th in total, to explain why inflation remains so far above target.

The increase in CPI in July is expected by the Bank of England, which has forecast inflation hitting 5% by the end of the year as steep rises in electricity and gas prices come into effect.

With the UK facing a period of continued sluggish growth, the Bank expects inflation to fall below the 2% target to 1.8% in two years' time, particularly as the impact of this year's VAT increase falls out.

The bigger-than-expected fall in June's figure reflected retailers cutting prices in response to the tightening squeeze on household incomes.

While there has been little respite on the high street, the comparative figure for July 2010 was weak and will force up this year's rate.

Victoria Cadman, an economist at Investec Securities, said lower food and petrol prices will limit the rise this month, with recent data from the British Retail Consortium showing prices fell by 0.6% in July from June.

Oil prices have also fallen, with some of the main supermarkets cutting their forecourt prices, while motoring organisation the AA indicated prices of both petrol and diesel had eased a little.

If the figures come in as expected, July will be the 20th month running that CPI will have missed the Bank of England's target of 2%.

The formula for calculating rail fares is RPI plus 3% and it sets the price for regulated fares, which includes season tickets. RPI is set to remain at around 5%.

PA