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Bank of England blames VAT hike for rising cost of living

The Governor of the Bank of England has written to the Chancellor as inflation is yet again above ta

Mervyn King, the governor of the Bank of England, has written yet another open letter to the Chancellor, George Osborne, to inform him that inflation has again risen well above the two per cent target.

The Office for National Statistics (ONS) reports today that Consumer Price Index (CPI) inflation has risen to 4.4 per cent, up from 4.2 per cent in June. The ONS cites financial services, housing rent, furniture, furnishings and household textiles, and men's and children's clothing as the main "upward pressures". "Downward pressures" listed were food and non-alcoholic drinks.

Retail Price Index (RPI) inflation stood unchanged at five per cent. Inflation in the UK is also above the European average of 3.1 per cent, the ONS reported. However, King claimed that "[t]he big risks currently facing the UK economy come from the rest of the world."

The Bank of England is obliged to write to the Treasury every three months if inflation is above target, as it has been for 13 months.

King attributed the rising cost of living to "an increase in the standard rate of VAT to 20%, and past increases in global energy prices and import prices."

He added that "[a]lthough the Committee's central view is that inflation is likely to fall back in 2012, very significant uncertainties and risks around the outlook for inflation remain."

Referring to financial instability in the eurozone and US economies, King also said "[t]here is a risk that this could lead to further severe stress and dislocation in financial markets and, were this risk to crystallise, it would have a significant impact on the UK economy."

Figures about the increased cost of living come at the same time as the coalition announces rail prices are to rise by as much as 13 per cent.