Pay packets to take a hit as inflation is expected to rise again

Inflation is expected to increase this week, dealing a blow to hopes that a moderation cost of living rises would help to support an economic recovery.

Figures for the Consumer Prices Index in May will be released on Tuesday, with City analysts expecting them to show an uptick in the annual inflation rate to 2.6 per cent.

In April, the inflation rate registered a sharp fall from 2.8 per cent to 2.4 per cent, thanks to lower fuel cost increases than a year earlier. But economists expect unflattering price comparison effects with last year to push up the inflation rate over the remainder of 2013. "We judge that it is likely inflation will surpass the 3 per cent level next month, which would entail the new Bank of England Governor, Mark Carney, needing to write an open letter to the Chancellor in August," said Philip Shaw, chief economist at Investec.

The Bank of England's inflation projections show the rate peaking at over 3 per cent later this year and then only falling gradually to the official 2 per cent target in 2015.

Inflation has outstripped pay rises since the 2008 crisis, meaning that real pay has been falling. Figures show that total pay rose by 1.3 per cent in April on the previous year, an improvement on the previous month, but still a real-terms pay cut.

A Monetary Policy Committee member, Ian McCafferty, has admitted that it is "easy" to see why people might think the Bank has become tolerant of higher inflation given the persistent overshoots of the official 2 per cent target.

However, data releases in recent weeks have convinced many analysts that the picture is brightening.

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