Data released by the Office of National Statistics (ONS) found that inflation rose to an 11-year high in June to 3.8%.

The inflation figure would have been available to the Monetary Policy Committee (MPC) when it made its recent decision to hold the base rate at 5%. This is the second consecutive month that inflation has continued to rise above the 3% cut off point set by the treasury. In June, Mervyn King, governor of the Bank of England (BoE), wrote to the Chancellor explaining why inflation rose above 3% and what he planned to do about it. With the rise in inflation the MPC is now faced with the possibility that increasing the base rate may be its only option.

Darren Cook of Moneyfacts.co.uk told PIN: “It is not unexpected that inflation is rising, however the rate at which it is increasing is a surprise. I predict inflation will hit 6% by the end of the year. The MPC is caught between a rock and a hard place with not wanting to raise the base rate but at the same time trying to curb inflation. A rise in the base rate would be a huge issue for affordability and could compound the current economic problems and push households over the edge. One of the effects of the credit crunch may be that banks are able to do the MPC’s job for them. With access to credit severely reduced, spending will hopefully decrease without the need for a rise in the base rate.”