Inflation to hit 20-year high?

Massive energy price increases and food costs could mean UK inflation soon hits a 20-year high, the Bank of England has warned. Officially the Bank of England is supposed to rein in inflation - 4.2% currently - at 2%. But a new report suggests that the bank thinks inflation could soon surge beyond 5%.

Costs pressure

"In the light of recent developments in utility and food prices, the peak in inflation was likely to be a little higher and come sooner than the Committee had previously expected," the bank reported in its latest policy minutes.

Which is slightly understating the case. Energy price rises have been well documented in the last year. But there's no stopping them now. The latest is Scottish and Southern Energy, which, following British Gas, has announced a whopping 18% gas price hike, plus an 11% rise for electricity. An increase of £171 a year for the average family.

Other sharp prices rises include staples like cooking oil and coffee. Sugar prices have soared, as have feed for animal products, pushing up the cost of meat and many dairy products. Disposable income is further pressurised by the VAT rise, more tax and national insurance pressure.

Bottom rung

Many UK workers are not seeing their wages rise in line with prices. Good news for the bank of England, of course, as it helps dampen inflation. But for most consumers and families, it's awful.

And we haven't mentioned all those savers struggling to make any headway with what they've got locked up in the post office or bank. Basic rate taxpayers need to earn at least 5% on what they've got locked away in order to make any meaningful return on living costs.

The only good news is for home owners as the Bank of England is unlikely to raise rates currently, given the weakness of the UK economy. Some think rates may even stay at 0.5% until 2014.

However making long-term predictions about interest rates is a mug's game.

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