Inflation set to reach 7 per cent, warns Chelsea

Soaring food, rent and petrol bills mean that the average UK householder could face annual retail inflation of 7 per cent, according to a new report to be published tomorrow by the Chelsea Building Society.

Darren Stevens, a Chelsea director, said that recent price increases could double the annual inflation for all goods and services by the end of the year to 7 per cent, pushing it to the highest level for 17 years.

Mr Stevens said the building society, which is the UK's fifth largest, has seen its customers use their savings to pay for bills. "Unfortunately, this seems set to continue," he said. "Recent fuel hikes, food increases and rental demands are forcing people to find further ways of affording life's essentials."

Chelsea's forecast follows the Bank of England's quarterly inflation report, published last week, which gave the bleakest outlook on the economy for more than a decade.

The Bank's Governor, Mervyn King, predicted that inflation would peak at 5 per cent at least and that gross domestic product growth is likely to hover around zero for the next year. He avoided saying "recession", but warned that the economy required a "painful" adjustment.

Financial markets took this as a sure sign that the UK is heading for recession and that interest rate cuts will come sooner rather than later, prompting sterling's sharp falls.

John Wrigglesworth, the housing guru and consultant who advised Chelsea on the report, predicted that the UK is now heading for recession territory. He said on Friday that the housing market was heading for further falls of up to 10 per cent and that attempts by the Chancellor, Alistair Darling, to kick-start the market with hints of stamp duty cuts were "foolish and incompetent".

"Dithering Darling has shown himself to be inept. Instead of helping the market, what he has done is stop anybody from doing anything. Why would anyone try to buy or sell a house now if they think there are cuts to come?" he said. "Darling should have just announced a cut – that would have been a real trigger to get things moving again."

Further news on the state of housebuilding comes this week with half-year results from Persimmon, one of the UK's biggest builders. It will confirm that prices for its houses have fallen by at least 4 per cent. Persimmon's shares have crashed to 357p from 915p earlier in the year.