The Bank of England had warned the UK was heading for difficult times and it would act to rein in inflation. The Bank of England's governor, Mervyn King, said the UK was facing its "most difficult economic challenge for two decades". (View video of speech) The following day a record level of retail spending in May provided a respite from gloomy economic predictions, but it also fanned fears of higher interest rates. Sales rose by 3.5% during May, the strongest monthly growth since January 1986, statistical office figures show. Shocked analysts said the figures ran contrary to signs of a slowing economy and weak consumer confidence. (Details here)Mervyn King made it clear that inflation was set to rise whilst house prices would fall. He said the MPC was "prepared to take whatever action is needed" to bring inflation back down to the government's 2% target. The latest inflation figures showed that the rate of consumer price growth had accelerated to 3.3% in May. However, Mr King added that monetary policy alone could not prevent the current effects of rising food and energy prices on living standards. People would have to accept that their pay rises would have to be limited which would affect real take home pay and make life difficult for some.
Numerous reports overthe past few days have confirmed a significant economic slowdown. The Chancellor, Alistair Darling, has said that there is "no doubt" the UK economy is slowing and has warned it will be a "difficult year" ahead. He warned of the dangers of allowing inflation to increase, calling for pay restraint to prevent the development of a wage-price sprial, so familiar to economics students of my generation. He pointed out that fuel and food price increases were hitting consumers. 
