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Inflation likely to hit 5% later this year

 The Bank of England is suggesting that inflation is likely to hit the 5% mark later this year.

According to the Bank’s latest inflation report, the economy remains under pressure and household finances have been put under strain by rises in utility bills and falling real incomes. The report assumes a 15% rise in electricity prices, and a 10% increase in gas bills, which will further squeeze consumer budgeting.

Mervyn King, the Governor of the Bank of England  said “There is a good chance that inflation will reach above 5% later this year and is more likely than not to remain above the 2% target throughout 2012, boosted by the increase in VAT, higher energy and import prices,”

 While inflation is expected to remain above 2% in 2012, the Bank predicts a reduction through next year and 2013, as the impact of VAT and other economic stresses ease, but the bank says there is a ‘great deal of uncertainty about the outlook for inflation.’

The bank has also downgraded its prediction for growth in the UK economy from 2.00% to 1.75% in 2011. The Office for National Statistics reported a rise in growth of only 0.5% in GDP in the first quarter of this year, which was weaker than expected.

This all adds to speculation about whether the bank will bow to pressures to increase interest rates. With the economic recovery so fragile it may well be a mistake to do so, especially as the inflation is not caused by consumer demand and spending but rather price rises beyond their control.

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