Brits fear inflation will rise further

Consumers expect inflation to rise to 4.6 per cent over the next 12 months, lessening the liklihood of an interest rate cut in the short term.

The Citigroup/Yougov survey for June found expectations for inflation have hit their highest level since the survey started in 2005.

The figure is up from the 4.1 per cent expected in May and 3.1 per cent back in February.

Economist Howard Archer said the Bank of England's monetary policy committee (MPC), which monitors the survey, will be concerned by the figures.

"The MPC is particularly worried that an extended period of markedly above-target consumer price inflation - primarily resulting from higher utility and food prices, as well as a markedly weaker pound - could lead to a long-lasting rise in inflation expectations," Mr Archer said.

"Sustained, heightened inflation expectations would be liable to adversely affect the behaviour of price and wage setters, thereby increasing the risk of a very damaging price-wage spiral developing."

Mr Archer added the further sharp rise in inflation expectations in June increases the risk that the Bank of England may feel a need to raise interest rates from five per cent to 5.25 per cent to ensure the current inflation spike does not become permanent.

Meanwhile, inflation in the OECD area rose by 3.9 per cent in the year to May 2008, the biggest jump for seven years, the organisation said today.

The Organisation for Economic Development and Co-operation said consumer prices among its 30 member countries rose 0.7 per cent in May, compared to 0.5 per cent in April.

Food and energy were major drivers in pushing up prices, the group said, with energy costs up 14.6 per cent year-on-year in May and food prices up 6.1 per cent.

Excluding food and energy, consumer prices rose by 2.1 per cent in the year to May, compared with two per cent in April.

In the US, inflation is rising strongly and increased to 4.2 per cent in the year to May, compared to 3.3 per cent in the UK and France, three per cent in Germany and 2.2 per cent in Canada.

An Ipsos Mori poll reveals 22 per cent of Brits see inflation as an important issue facing the UK, double the level two months ago.

Behind inflation, the greatest concern was rising petrol prices, cited by 16 per cent – making petrol fears the greatest since 2000.

"While public concern about the issue has not reached the levels recorded during the recession of the early 1990s (where it reached 32 per cent in August 1990), the current trend appears to be of rapidly growing apprehension," an Ipsos Mori spokesperson said.

He added the recent rises in fears over inflation and credit crunch showed consumers are beginning to feel the effects of the credit crunch for themselves.

The largest concern remained crime, followed by the economy and immigration.