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Households feel pinch as high inflation bites

Inflation remained at a two-and-a-half-year high in May, official figures have revealed, as rising food, drink and fuel prices added to the squeeze on household spending.

The Consumer Prices Index (CPI) rate of inflation remained at 4.5% last month, the Office for National Statistics (ONS) said.

It is the 18th month in a row that inflation has been above the Bank of England's target of 2%, continuing the pain for cash-strapped consumers.

Upward pressure on inflation came from food prices, which rose 1.3% between April and May, while alcohol and tobacco prices increased 0.7% over the month, driven higher by hikes in duty and VAT.

The price motorists paid at the pumps rose to a record high of £1.36p per litre for petrol and £1.42p for diesel.

However, these inflationary pressures were largely offset by a decline in transport costs, which had been higher the previous month as air fares shot up amid the flurry of bank holidays caused by Easter and the royal wedding.

Yesterday's announcement will keep pressure on the Bank of England to raise interest rates from their record low of 0.5% in a bid to beat down inflation.

But any calls for a rate hike are likely to be ignored as Bank governor Sir Mervyn King and his fellow Monetary Policy Committee members have already said they expect inflation to peak at 5% later this year before starting to fall back towards its target throughout 2012 and 2013.

Wilfred Mitchell, policy chairman of the Federation of Small Businesses, said it believed rates should stay at 0.5% "until the recovery has seen stronger growth and is more secure".

Dr Esmond Birnie, PwC chief economist, predicted the MPC would ignore the pressure to put rates up until at least winter this year. "That means the UK's fragile economic recovery is likely to continue to benefit from very low Bank of England interest rates for a few months longer," he said.

Jonathan Loynes, an economist at Capital Economics, expects further rises in food prices and future rises in gas and electricity bills "to take the headline inflation rate above 5%, and perhaps even above 5.5% by late summer".


The record price that motorists paid at the pump for a litre of petrol