Rocketing fuel prices have led to inflation reaching its highest level for more than two years and living costs are set to keep rising over the next 12 months.
The Office for National Statistics said the Consumer Prices Index rate of inflation hit 4% last month, up from 3.7% in December.
Increasing VAT from 17.5% to 20% and the soaring price of crude oil are being blamed for the rise, but Bank of England governor Mervyn King has warned that inflation could remain at similarly high levels for the rest of the year and possibly beyond.
The Bank of England is facing fresh calls to raise interest rates as it was warned pensioners are being hit with a double whammy of price rises and a low return on their savings because of rising inflation.
Age Scotland said people dependent on their pensions are being penalised the most by incessant price rises.
A spokesman said, “The fact is everyone is suffering but elderly people are suffering more because they are more susceptible to increases in fuel costs, not just through VAT but also through the massive price increases we have seen.
“We won’t see pensions going up with inflation, and the double whammy is that for savers even an ISA is only paying out about 2.5% and a normal account about 0.05%.”
Shona Dobbie, head of the Dundee-based Alliance Trust Research Centre, said, “The elderly age groups continue to face an inflation rate significantly higher than the headline rate as food price inflation remains persistently high.”
Mr King admitted there is “great deal of uncertainty” over the outlook for inflation.
In a letter to Chancellor George Osborne, Mr King said inflation was likely to continue to pick up to between 4% and 5% over the next few months and admitted there were “real differences of view” among Bank policymakers about how to tackle it.
There are fears the economy could slide into a period of stagflation, where minimal growth and high levels of unemployment are combined with soaring prices.Inflation above targetAlthough the CPI rate of inflation did not rise as high as the 4.1% predicted, another method of measuring inflation, the Retail Price Index, hit 5.1% last month.
In his letter to Mr Osborne, Mr King said the high level of inflation was due to the rise in VAT, the low value of the pound and rising energy prices.
“There is a great deal of uncertainty about the medium-term outlook for inflation. And I do not wish to conceal there are real differences of view within the committee, reflecting different judgments about the risks to that outlook,” he said.
The governor said the Monetary Policy Committee believes that pulling inflation back to target quickly could damage economic growth.
Mr King said there was also a risk the high cost of living could increase inflation expectations what people believe will be the long-term rate of inflation and thereby pull up wages and other prices.
“Inflation is likely to remain above target for this year, before falling back in 2012,” he said.
Prime Minister David Cameron declined to comment on the soaring rate of inflation.
A spokesman said, “We have to deal with public debt and a record deficit and we have to rebalance our economy so it is not reliant on one region or one industry.
“We recognise that that process is going to take time.”
Scottish Labour Leader Iain Gray said, “These figures show why the Tory approach is so dangerous and raising VAT was a terrible mistake.
“Scottish families find it hard to make ends meet as it is, and now we see that prices are rising faster than thought.”Families ‘punished’SNP Treasury spokesman Stewart Hosie MP said, “This is not the time to raise interest rates, which would just punish families and businesses more.
“The UK Government must take action to take the sting out of these rises and, given that fuel prices have risen 15% in the last year, contributing significantly to the inflation rate, the Chancellor must act now to bring fuel prices down.”
Shelter Scotland director Graeme Brown said, “People are already desperately struggling with more than 200,000 people in Scotland so financially stretched they resorted to credit cards last year to pay their rent or mortgage while 375,000 took on extra work just to make ends meet.
“This latest increase will seriously threaten their ability to keep a roof over their head in the coming months.”
However, he warned that raising interest rates could make matters worse for thousands of homeowners.
He said, “We are also very concerned about the additional pressure rising inflation will put on the Bank of England to raise interest rates, potentially pushing thousands more into a spiral of debt, repossession and possible homelessness.”
Grahame Smith, general secretary of the Scottish Trades Union Congress, also argued against increasing interest rates.
He said, “Another substantial increase in inflation was confirmed, thereby ensuring that real-terms pay will continue to decline at a rate not seen since the 1920s.
“According to ONS, the two main factors accounting for this increase were higher fuel prices and the government’s decision to increase the regressive VAT.”
He added, “The last thing the economy needs is a hike in interest rates to appease the City.
“If the Chancellor is remotely concerned about growth and jobs he must rip up his current strategy and use the March Budget to start again.”
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