Bank chief: two years of high inflation to come

In his open letter to the Chancellor, Bank Governor Mervyn King blamed a 60 per cent rise in world agriculture prices, an 80 per cent spike in the oil price and a 160 per cent surge in wholesale gas prices for the sharp rise in the cost of living.

A detailed analysis of today's inflation figures reveals that it is many of the unavoidable staples of life that are going up most and contributing to the squeeze on living standards.

Food prices jumped by 1.5 per cent last month alone, lifting their annual increase to 7.8 per cent.

Commentators said that the "real" rise in the cost of living was much higher than the official 3.3 Consumer Prices Index rate as most of the biggest rises were concentrated on goods and services that ordinary families cannot avoid paying.

Food bills, the cost of lighting and heating and the cost of running a car are responsible for 92 per cent of the rise in the cost of living since December.

The increases also bring more pressure on employers to raise wages, setting off the dreaded pay-price spiral of inflation that scuppered the economy in the Seventies, Eighties and early Nineties.

Ann Robinson, director of consumer policy at price comparison website uSwitch.com, said: "This is further evidence that life is getting tougher. Unprecedented hikes in the cost of food, energy and fuel, topped with relentless tax rises, are forming an increasingly large hole in people's pockets.

"Essential living costs have risen by an average of 7 per cent from June 2007 to June 2008, but with salaries expected to increase by just 3.4 per cent this year, households are witnessing a substantial deficit. We are working harder than ever before but we are not getting any richer."

Retailers said they were doing their best to keep prices under control and were not passing on the full cost increases to consumers.

Stephen Robertson, director-general of the British Retail Consortium, said: "Retailers are the good guys here. 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.

"In his letter to the Chancellor, Mervyn King rightly highlights that, while world agricultural prices have risen by 60 per cent, UK retail food prices have only gone by eight per cent.

"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.

"Food prices will be a key topic at this week's EU Summit and an issue we have discussed with the Government.

"As the Government responds to pressure for new regulations in areas such as alcohol and supermarket-supplier relationships, it should think long and hard about the impact on customers of piling on new costs and further fuelling inflation."

Gordon Lishman, director general of Age Concern, said: "Small increases to the basic state pension each year have simply failed to keep pace with the escalating cost of living for older people.

"The Government should increase the state pension to at least £124 a week, reinstate the link to earnings as soon as possible, and do much more to get money to those who need it so that all pensioners can afford a decent quality of life."