The news follows Tuesday’s announcement from the Office for National Statistics that the consumer price inflation rate had leapt to 4.4 per cent in July – more than double the government’s target of 2 per cent, and up from 3.8 per cent in June – as food and fuel prices spiked.
The Bank of England’s quarterly inflation report outlined both risks to growth and factors putting upward pressure on pricing.
“In the United Kingdom, output growth eased in the second quarter and surveys pointed to further slowing in the third,” the report said. “Consumer spending appeared to decelerate as households’ real incomes were squeezed. Residential and business investment prospects deteriorated.”
It went on to conclude that “the main risks to inflation... have both increased since the May Report”.
The analysis implies that the central bank governor, Mervyn King, will probably keep interest rates at 5 per cent for the next quarter.
Although rate cuts would revive consumer spending and help to stimulate Britain’s slowing economy, they would also likely spur inflation even higher.
Sterling fell to a 21-month low against the dollar on the back of the report.