Inflation still above Bank’s target

15th August 2006

New figures show that inflation fell slightly last month – but still remains above the Bank of England’s 2% target. The Consumer Price Index (the Government’s preferred method of measuring inflation) dipped from 2.5% in June to 2.4% in July.

This could mean another rise in interest rates before the end of the year. Fears of rising inflation – sparked by high energy prices – prompted the Bank to raise interest rates by 0.25% to 4.75% earlier this month. The Bank’s Monetary Policy Committee sets interest rates every month, to stop inflation going above 2%.

Last week, the Bank’s governor, Mervyn King, warned there was a 50-50 chance that inflation would rise above 3% over the next six months. If that happened, it would force Mr King to write an explanatory letter to the Government for the first time since the Bank was given control of interest rates in 1997.”

With energy costs remaining high and the housing market buoyant, some experts think that rates may soon rise again. But others think that the latest hike was a one-off, designed to nip inflation in the bud.

Market commentator Justin Urquhart Stewart, of Seven Investment Management, said: “The market now anticipates a further UK interest rate rise but probably not until late this year or even early 2007 – but a lot can happen in that time, especially if the economy does slow down significantly.”