Questions asked over cost of living

Rising fuel and food costs have forced inflation higher. Under the Retail Prices Index (RPI), it rose to 4.3% in May from 4.2% the previous month. The rise provided food for thought for wage negotiators, who use the RPI in pay claims.

However it was the Consumer Prices Index (CPI), which was under the spotlight last month. The CPI rose by 3.3% in May — up from the April rate of 3.0%. Similar reasons for the rise in the RPI were given. This measure, which excludes housing costs, was at its highest level since records began in January 1997.

As the rise has gone one per cent above the government’s 2% inflation target, Bank of England governor Mervyn King had to write to the chancellor Alistair Darling to explain the bank’s inflation policy. It is only the second time that the governor has had to take such action — the previous time was in April 2007.

In his letter, the governor said inflation rates should peak towards the end of this year, as long as there were no “unexpected increases in oil and commodity prices”.

The rise in inflation may mean the current 5% interest rate goes up rather than down, not a favoured option for the TUC, whose head of economics Adam Lent argued that any rise would “slow the economy”, and there was no point in the economy “taking medicine with nasty side effects if it doesn’t produce a cure”.