Inflationary pressure to continue hitting consumer pockets

Following yesterday's quarterly inflation report by the Bank of England, Ted Scott, manager of the F&C UK Growth & Income Fund is not surprised by the UK central bank's forecast inflation figure of 3.7% for this year.

"It has been evident for some time that inflation has been climbing in the UK. The official rate of inflation has for a long time considerably understated the real rate of inflation that consumers have been facing which is probably nearer 7 or 8% rather than 3%", he commented.

Higher food and energy prices - including oil price above $120 a barrel - have contributed to inflationary pressure in high streets and petrol stations across the country. Scott believes this trend is likely to continue for some time.

"Yesterday Centrica, who is responsible for British Gas, indicated they will put up fuel prices again in the UK, probably by 10 to 20%. Other fuel companies are likely to follow, putting more pressure on the already stretched household budgets," he explained.

This gloomy outlook is compounded by an economy which is significantly slowing down. Nearly a year after the credit crunch in the US, the UK is still feeling its impact on its own financial system.

"With inflationary pressure on one side and a slowing economy on the other, the Bank of England is in an awkward situation. They would like to be in a position to lower interest rates further but so far they have been tentative in their monetary policy by only lowering rates gradually, in contrast with the Federal Reserve which has been much more aggressive. One of the reasons is that the Bank of England has a mandate of keeping inflation at a 2% target, and it is well above that already."

To make things worse, Sterling has considerably weakened against both the euro and the dollar over the last year, leading again to inflationary pressures. "Mervin King's position is far from easy", he concluded.