Inflation reappears on the Bank of England’s radar

The Bank of England's rate-setting Monetary Policy Committee is growingly increasingly concerned about a possible resurgence in inflation.

CPI inflation hit 3.4 per cent in March, significantly above the 2 per cent target set by the Treasury, while RPI inflation was up to 4.4 per cent.

The MPC voted to keep interest rates on hold at 0.5 per cent this month, but minutes of their meeting indicated a level of unease over the rate at which inflation is rising.

The minutes noted: "There were also some upside risks to inflation. Oil and some other commodity prices had risen substantially over the past two months, raising the near-term outlook for inflation.

"And, although measures of households; medium-term inflation expectations had remained reasonably stable, some measures of financial market participants' inflation expectations had been drifting up.

"Given that a period of above-target inflation was in prospect at a time when monetary policy was exceptionally accommodative, this was a source of concern to some members."

The weakness of sterling, the recent hike in VAT and spiralling commodity prices have all contributed to the sharp rise in the cost of living.

Some experts are predicting that the Retail Prices Index rate of inflation will breach 5 per cent in April.

The RPI figure is used as a gauge for pay settlements, and it is clear the Bank is concerned that inflationary pressures may lead to an increase in wage deals, so pushing inflation higher still.

Analysts suggest that, were prices to continue to rise, the Bank of England may have to consider a hike in interest rates before the economy has fully recovered.