Page last updated at 21:42 GMT, Tuesday, 15 July 2008 22:42 UK

Inflation at 11-year high of 3.8%

How shoppers are spending in one major retail centre

Rising food and fuel costs pushed UK inflation up to an 11-year high of 3.8% in June from 3.3% in May, figures show.

The rise means inflation is now well above the government's 2% target, and may reduce the chance of a UK rate cut.

The Bank of England, which has already said inflation may top 4% this year, has to balance the need to control inflation with worries over growth.

The RPI inflation measure - often used as a benchmark in pay negotiations - rose to 4.6% in June from 4.3% in May.

The annual rate of inflation is at its highest level since 1997, when the Office for National Statistics started using its current methodology to calculate the figures.

However, inflation is still way below levels seen in the early 1990s.

Restraint

Commenting on the figures, Chancellor Alistair Darling called for wage restraint in order to help rein in price growth.

"We saw what happened in the past when inflation got out of control and people found that every penny they got in a wage increase was swallowed up by food and fuel prices going up," said Mr Darling.

"Whether you are in the private sector, or public sector, whether you are sitting in the board room or working on the shop floor, we cannot allow inflationary wage increases because that would mean that everyone, especially people on lower incomes, would suffer," he said.

Shop sale
Retailers are facing tough conditions on the High Street

But the high inflation figures drew criticism from the Conservative and the Liberal Democrats, who questioned Mr Brown's effectiveness in his former role as chancellor.

"Inflation is now more than double the rate that Gordon Brown inherited from the last Conservative government," said shadow chancellor, George Osborne, who also accused Mr Brown of "shrugging his shoulders" over the economic woes.

Liberal Democrat Treasury spokesman Vince Cable said the data proved Gordon Brown had lost his focus while chancellor.

"Gordon Brown is now facing the consequences of years of inaction over spiralling personal debt and the unsustainable bubble in the housing market," said Mr Cable.

"The Prime Minister bases his credibility on his economic record, yet it is now becoming startling clear he was asleep at the wheel."

Cheaper clothes

Food and non-alcoholic drinks were the main factors fuelling the rise in inflation, with prices increasing at a record pace of 9.5% in June from the same month a year earlier.

The fact that the economy's slowing will bring inflation down, but not till next year
John Cridland, CBI

When compared with May, food and non-alcoholic drinks were 2.1% higher.

Meanwhile, surging oil prices have driven up the cost of fuel with the average price of petrol increasing by 5.3 pence a litre.

One positive for consumers during the month was a drop in the cost of shoes and clothes as retailers cut prices in an attempt to attract more business.

Rate dilemma

The inflation figures, which came in above forecasts for the third month in a row, mean that the Bank of England is now likely to have less opportunity to cut interest rates.

The Bank is currently trying to balance growing evidence of an economic slowdown against the problem of rising inflation.

"The Bank of England can't cut rates until it is convinced inflation is moving downwards," said James Knightley, economist at ING.

However, the British Chambers of Commerce (BCC) warned it would be a "serious mistake" if the Bank's Monetary Policy Committee (MPC) decided to tackle rising inflation by raising rates.

"Further increases in CPI inflation, to levels above 4%, are inevitable in the next few months whatever the MPC decides to do," said BCC economic adviser David Kern.

Economic gloom

The inflation figures add to mounting bad news for the economy.

Earlier on Tuesday, the British Retail Consortium said that like-for-like sales on the UK's High Streets were down 0.4% in June compared with a year earlier.

On Monday, figures showed that factory gate prices - a measure of how much manufacturers charge for their goods - rose 10% in the year to June, the first double-digit annual rise for more than 20 years.

However, the CBI business group said that while UK businesses will be facing a few "tricky" months as consumers tighten their purse strings, there could be a "silver lining" in store for the economy.

"The fact that the economy's slowing will bring inflation down, but not till next year," said CBI deputy director general John Cridland.


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