The Bank of England is coming under increasing pressure to raise interest rates as the rate of inflation continues to creep up.

The Office for National Statistics said on 14 December that the consumer prices index (CPI) measure of inflation was 3.30 per cent in November up from 3.20 per cent in October.

The rising level of inflation is putting pressure on the purchasing power of incomes, particular people who use interest from savings to boost their income. The Bank’s Monetary Policy Committee has refrained from raising interest rates from the 0.50 per cent level, a downward pressure on the yield available from savings.

Although there is increasing concern about the persistence of inflation, the Bank believes temporary price spikes are causing the level of inflation to remain significantly above the two per cent target.

In a speech at the beginning of December chief economist at the Bank of England, Spencer Dale said: “To have tried to have used monetary policy to offset the impact of these price level shocks on headline inflation would have required us to have tightened monetary policy in the depths of the recession. That would have led to an even bigger fall in output, an even bigger rise in unemployment, and an even bigger risk of materially undershooting the inflation target in the medium term.”

While the Bank believes inflation will remain above target through most of 2011 – partly due to the scheduled rise in VAT to 20 per cent in January – it predicts the rate of inflation will begin to fall towards the end of 2011.

Inflation causes

Inflation in the UK remains higher than the rate of price rises across the EU, where the rate in October was 2.30 per cent.

This has been caused by upward pressures from a rise in the cost of food and non-alcoholic drinks, the most significant increases in the cost of bread, cereals and meat.

Clothing and footwear prices rose by two per cent – a record increase for an October to November change – and the cost of furniture, household equipment and maintenance also went up.

The monthly inflation analysis from investment manager Alliance Trust said that 50-64 year olds were facing the highest rate of inflation at 4.10 per cent, largely due to the high transport costs for this age group.

The firm said the spending trends of over-75s meant the rate of inflation was around 3.80 per cent for people in this age group because as well as pressures on food prices, people were also likely to be facing higher energy costs.

The retail prices index (RPI) was up from 4.50 per cent in October to 4.70 per cent in November, also driven by factors affecting CPI.

The RPI measure of inflation includes certain items excluded from the CPI such as mortgage interest payments and council tax, as well as a car price index based on used car prices.

While these items are excluded from CPI, costs unique to the CPI are the cost of university accommodation and an index based on the price of new cars.

© Fair Investment Company Ltd