Just after Ken Clarke, the Justice Secretary, warned the British middle class that the UK economy was in a 'calamitous' situation and that he didn't think that 'Middle England has quite taken on board the scale of the problem', comes news that inflation is expected to rise to double the target rate of 2%.


The recent news on the trade deficit in goods and services as well as the initial estimates of the drop in GDP on December have also not helped.

Analysts are, according to the Telegraph and Express, expecting the the Consumer Prices Index (the government's preferred inflation measure) for January to have risen from 3.7% in December to 4% in January, the highest for 26 months. This will mean that Mervyn King, the governor of the Bank of England, will have to write another letter (his tenth) to the Chancellor to explain why.

One of the other measures of inflation, the Retail Prices Index, is also expected to show a rise of 0.3% from 4.8% to 5.1%. Some people consider this a more accurate measure of true inflation as it includes housing costs and mortgage interest payments.

Recent demand and speculation have been drivers in the rise of commodity prices as has been the weakening of sterling. And the recent rise in VAT from 17.5% to 20% added, in real terms, 2.1% to the price of all VATable items in one fell swoop in January (if the cost was passed on to the consumer).

The telegraph reports some analysts such as Barclays Capital UK economist Simon Hayes, saying that CPI may hit as high as an 'extremely uncomfortable' 4.4%. But Mervyn King has said that even of it hit 5% it would nor change his view that inflation would drop later as the 'temporary shocks' fed through the economy.

Many have called for an interest rate rise by the Bank of England to quickly stifle inflation, but with Mervyn King at the helm it looks like it's steady as she goes.

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