Inflation up to 3.3%

Inflation rose to 3.3% in May

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The rate of inflation rocketed to 3.3% in May, leaving the Bank of England with a difficult decision to make about interest rates.

The Consumer Price Index, which is used to measure inflation, rose from 3% in April to 3.3% in May - way beyond the 2% target.

The Retail Price Index also rose to 4.3% in May against 4.2% in April according to the Office for National Statistics (ONS).

The rises were primarily blamed on price increases on food and drink but the rising price of oil also had a significant impact.

Bank of England governor Mervyn King has been forced to write an open letter to the Chancellor explaining why the rate of inflation has been pushed more than 1% above the 2% target. In it he warns that inflation is likely to rise further to 4% in the second half of the year and that inflation will remain above the target into 2009.

He added that to move the Bank rate to curb inflation would cause "unecessary volatility in output and employment" but warned that further price rises would also be difficult.

King said the monetary policy committe, which sets interest rates, would continue to make a decision on interest rates on a month by month basis.

Rising inflation would normally heap pressure on The Bank of England to increase interest rates in an effort to curb inflation. However slowing consumer spending means the Bank faces a balancing act to manage both inflation and interest rates while attempting to stimulate consumer spending.

The Bank of England held interest rates at 5% at its last rate-setting meeting on June 5.

Stephen Robertson, director general of the British Retail Consortium, said: "Retailers are the good guys here. Overall inflation would be a lot higher if it weren't for retailers' efforts to shield customers from the full impact of rising costs, even at the expense of their own margins."

Robertson added: "In his letter to the Chancellor, Bank of England Governor Mervyn King rightly highlights that, while world agricultural prices have risen by 60%, UK retail food prices have only gone by 8%. Retailers are working hard to help cash-strapped customers with discounts and promotions and, let's not forget, the price of non-food goods continues to fall."

Click the attached PDF to read Mervyn King's letter in full.