Financial Market

In the month of June UK inflation increased to an 11 year high of 3.8%, up from 3.3% in May, helped by increasing rising food and fuel costs.

The rise puts the countries inflation rate significantly higher than the governments 2% target and will certainly steer the Bank of England away from further rate cuts in the near future.

The UK’s central bank has said that inflation may increase above 4% in 2008, doubling the governments target, however as worries over the economies growth continue to grow the Bank of England is left with a tricky balancing acts.

The Bank of England can’t cut rates until it is convinced inflation is moving downwards,” said James Knightley, economist at ING.

Often used as a benchmark for pay negotiations, the RPI inflation measure rose from 4.3% in May to 4.6% in June.

Chancellor Alistair Downing has called for wage restraint in order to help rein in price growth.

“We saw what happened in the past when inflation got out of control and people found that every penny they got in a wage increase was swallowed up by food and fuel prices going up,” said Mr Darling.

He went on to say “Whether you are in the private sector, or public sector, whether you are sitting in the board room or working on the shop floor, we cannot allow inflationary wage increases because that would mean that everyone, especially people on lower incomes, would suffer,”

The biggest contributors to fuelling price inflation were the prices of non-alcoholic drinks and food, with prices increasing at a record pace of 9.5% in June from the same time last year. These figures were up 2.1% from May.

Increasing oil prices have also helped to drive up the cost of fuel with the average price of petrol increasing by 5.3 pence a litre.

A report released today indicates that contrary to popular belief the cost of motoring has fallen over the last two decades despite a 210% increase in the cost of fuel.

The report, compiled by the RAC says that since 1988 the cost of motoring in real terms has fallen by as much as 18% thanks to cheaper cars and better build quality, meaning fewer repairs are required on them.

Out of the 1,116 people who were surveyed, 60% believed the rising cost of motoring to be the biggest change in motoring over the last twenty years.

The report compiled was the RAC’s twentieth, which also reflected the growing menace of road rage as roads have become more congested and driven angrier as a result.

Over 30% of those surveyed as part of the report said that they had been a victim of road rage to the extend where they felt physically threatened, with half admitting swearing or gesturing in the other direction.

“It is worrying that millions of motorists are victims of a driving behaviour [road rage] that didn’t even have a name 20 years ago.” - RAC motoring strategist Adrian Tink

“This worrying behaviour becomes downright dangerous when you consider they are behind the wheel of a tonne-and-a-half of metal.” - RAC motoring strategist Adrian Tink

Other conclusions the report drew include:

1. Some 92% believe we are more reliant on our cars than in 1988
2. Of all households, 75% have a car, while seven out of 10 British adults carry a licence
3. The number of households with a car has gone from 14m in 1988 to 19.5m - an increase of 39%
4. Local speed limits of 30mph are accepted by 66% of drivers, but over half want to see motorway limits raised from 70mph to 80mph
5. The number of women drivers on UK roads has gone from 10.2m to 15.3m

Interest rates for the Eurozone were today raised to 4.25%, the first Eurozone interest rate rise in twelve months, in a move aimed at tackling record levels of inflation which this week hit 4%.

Rising food and fuel costs resulted in the European Central Bank raising its interest rate, a move which is thought could further weaken the dollar which is currently at a two month low, and lead to further increases in the trading price of oil.

In anticipation of the ECB’s rate increase, oil hit new record highs today, with Brent crude topping $146 a barrel for the first time.

The interest rate increase comes amid concerns that the eurozone economy is slowing and there are further concerns that rate hikes could slow the economy further.

“Today’s ECB interest rate hike underlines the bank’s determination to bring inflation down, even amid plain evidence of slowing gross domestic product growth” - Jennifer McKeown from Capital Economics.

Within the eurozone it was Spain who announced figures that suggested it is heading for recession with it service sector showing significant signs of retraction.

Other leading banks have also warned that It also signalled that more interest rate rises could be on their way if world oil and food prices continued to rise.