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Wednesday, March 23, 2011

Interest rate rise fear grows as inflation hits a 20-year record

By Becky Barrow

Retail Price Index rises from 5.1 to 5.5 per cent

Families are being punished by the highest rate of inflation for two decades amid fears of an interest rate rise.

Figures published yesterday put the retail prices index (RPI) measure of inflation at 5.5 per cent, the biggest annual increase in the cost of living since 1991.

At the current level, inflation is higher in Britain than any other European country – except Estonia, Bulgaria and Romania.

The figures were released on a day of bad news for the economy, which included:
n The cost of fuel hitting a record average price of £1.33 for a litre of unleaded.

n The announcement that public sector borrowing was the highest ever for a February at £11.8billion.

The spike in inflation is being partly blamed on January’s sharp rise in VAT from 17.5 per cent to 20 per cent. This has increased the cost of food, fuel and clothes.

Expert say that pay deals are failing to keep pace with the soaring cost of living.

The average worker is getting a rise of 2.1 per cent and state workers paid £21,000 or more are enduring a two-year pay freeze.

Rates rise? Inflation was higher than expected in February, piling pressure on the Bank of England to raise interest rates which have been at a historic low of 0.5 per cent for 24 consecutive months

To make matters worse, soaring inflation raises the prospect of the Bank of England hiking rates within months from the historic low of 0.5 per cent.

Around seven in ten home-buyers have a variable mortgage, which means their monthly mortgage payments will jump.

The biggest problem facing families is that the cost of ‘essential’ items is rising, which means they cannot escape. For millions, the biggest battle is finding the money to fill up their car.

The average price of petrol and diesel has never been higher.

For example, a 50-litre diesel car now costs £70 to fill, compared with £59 last year.

Unions said the inflation figures from the Office for National Statistics show ‘how tough it is for working families struggling to afford the most basic necessities, like food and fuel’.

Dr Ros Altmann, the director general of Saga, described the inflation figures as ‘truly dreadful’. The consumer prices index (CPI), an alternative measure of inflation, also rose sharply, from four per cent in January to 4.4 per cent in February.

This is more than double the Government’s two per cent target, and the 15th month that it has stubbornly stayed above the target.

In a further blow, a key member of the Bank of England yesterday warned that the figure could ‘easily’ hit five per cent this year.

Andrew Sentance, who has repeatedly voted for interest rates to rise, acknowledged the ‘squeeze’ on family finances from high inflation.

But many experts urged the Bank to resist the temptation to raise interest rates at such a fragile time for the economy.

Andrew Goodwin, senior economic advisers to the accountants Ernst & Young’s Item Club, said: ‘It would further crank up the pressure on embattled households.’

For savers, the misery which has lasted for two years continues, with their nest eggs being gradually eroded by inflation.

The average instant access savings rate is a paltry 0.85 per cent, and there is not a single savings account which beats the cost of living.

Jason Riddle, from the campaign group Save Our Savers, said retired people are being hit by a ‘double whammy.’

‘Pensioners can’t squeeze meaningful interest from their savings, so they are forced to draw on the nest egg itself, which reduces what little interest they can hope to receive,’ he added.



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