Expected inflation rise a blow to recovery
Inflation is expected to increase this week, dealing a blow to hopes that a moderation cost of living rises would help to support an economic recovery.
Figures for the Consumer Prices Index in May will be released tomorrow, with City analysts expecting them to show an uptick in the annual inflation rate to 2.6%.
In April, the inflation rate registered a sharp fall from 2.8% to 2.4%, thanks to lower fuel cost increases than a year earlier. But economists expect unflattering price comparison effects with last year to push up the inflation rate over the remainder of 2013.
"We judge that it is likely inflation will surpass the 3% level next month, which would entail the new Bank of England Governor, Mark Carney, needing to write an open letter to the Chancellor in August," said Philip Shaw, chief economist at Investec.
The Bank of England's inflation projections show the rate peaking at over 3% later this year and then only falling gradually to the official 2% target in 2015.
Inflation has outstripped pay rises since 2008, meaning real pay has been falling. Figures show total pay rose by 1.3% in April on the previous year, but that is still a real terms pay cut.