As a humble scribe himself, Cityblogger feels for Mervyn King, the Governor of the Bank of England, who has been forced to write a letter to Gordon Brown this morning to explain why inflation hit the dizzy heights of 3.3 per cent in May.

It isn’t always easy to find inspiration, but Our Merv certainly had plenty to write about. According to data from the Office of National Statistics, the Consumer Prices Index annual inflation, which the Government uses as its inflation yard stick, rose from 3.0 per cent in April to 3.3 per cent last month. And according to the rules, when inflation goes beyond 2 per cent Our Merv must write to Gordy and explain why.

The ONS says a range of issues were contributing factors, including the spike in meat and vegetable prices, higher gas and electricity bills compared to the same period last year and the soaring price of crude oil. The Retail Prices Index inflation also rose to 4.3 per cent in May from 4.2 per cent in April.

And in his letter Our Merv lays the blame squarely on the 60 per cent hike in world agricultural prices, the 80 per cent increase in oil prices and the 160 per cent jump in wholesale gas prices compared with May 2007, which has affected countries all over the world. What’s more, Merv reckons things will get worse before they get better. He expects inflation to top 4 per cent in the second half of this year, depending on fluctuations in gas and electricity prices. And he believes high inflation will continue well into 2009. Let’s hope he has plenty more pithy phrases up his sleeve as the Governor admits that this will probably be the first of “a sequence of open letters over the next year or so”. Oh dear!

Gloomy stuff. Cityblogger has already begun harvesting money-off vouchers from Great Aunt Vi’s copy of OK magazine, braving the beaming photos of Wayne and Coleen Rooney, in anticipation of another tough year. On the bright side, the ONS reckons that the UK inflation rate is at least lower than the European Union’s provisional figure of 3.6 per cent.

But it looks increasingly likely now that anybody hoping for another interest rate cut soon can whistle for it. “I suspect that UK markets can forget about any decrease in base rates for the time being,” warns David Buik at BGC Partners. “It seems a question now of when do they go up? Perhaps October, unless the UK economy shows signs of falling off the cliff. Even the CBI is worried about the UK’s economy and suspects conditions may deteriorate even further – as bad as it was in 1992.”

And as if to add insult to injury, the oil price hit $140 a barrel yesterday, although it has since dropped back. At least the FTSE100 is in buoyant mood this morning, up over 70 points to 5865, albeit still below 6,000, and boosted by a banking sector rally and bid speculation in the mining sector.

Bookmark with:
Digg	del.icio.us	Reddit
Facebook	Newsvine	StumbleUpon