Soaraway inflation warning

Monetary Policy Committee (MPC) member Tim Besley - who pushed for a rate hike in July - said the current price spiral "had to be nipped in the bud" to avoid a return to the era of Saturday Night Fever and Starsky & Hutch.

Writing in the Sun newspaper, Professor Besley said: "It would be easy to give in and let inflation get out of control - that's what happened in the 1970s. But it would be damaging and dangerous to the economy."

Last week official figures showed inflation hitting 4.4% in July - more than double the MPC's 2% target - as rising food, petrol and energy bills sent the cost of living surging higher.

The Bank of England voted to hold interest rates at 5% for the fourth month in a row two weeks ago due to the inflation pressures - despite the looming risks of a recession.

Minutes of the latest meeting, due to be released on Wednesday, are likely to show Professor Besley pushing again for a hike to control inflation expectations although he was outvoted by his eight MPC colleagues.

The rate-setter argued that the current pressure from food and energy bills would recede next year, but warned against inflationary pay deals to cope with the extra burden in the meantime.

"All being well, inflation will fall again next year and will be much closer to the two per cent target by the end of 2009. But that will only happen if people don't chase inflationary wage increases.

"Everyone wants to protect their living standard. But if everyone does it, prices will just go up again as businesses try to cover their higher costs. Then we'll all be back to square one, but with inflation still high," he added.

But in the meantime the UK faces a tough year ahead as the full impact of the credit crunch is felt. The Bank of England's latest inflation report predicts the economy spluttering to a halt over the next few months, while Governor Mervyn King said there "was bound to be a quarter or two" of negative growth.