Exporters in trouble against the strong pound

Interest Rate Rise Expected After Government Fails To Curb Inflation

Figures released show an increase of 0.3%, to 2.9%. The underlying rate - which excludes mortgage interest payments - also went up, meaning the government missed its inflation target.

The poor weather in June pushed up the prices of seasonal vegetables at their fastest rate for almost twenty years. Along with rising petrol prices, that pushed underlying inflation to 2.7 per cent, making the government miss its inflation target of 2.5% in its first full month of power.

Last week's budget - which was criticised for doing little to combat inflation - had already prompted speculation that the newly independent Bank of England would raise interest rates later this week perhaps by as much as 0.5%.

The news has sent the already strong pound to even greater heights - by the Bank of England's own measure to the highest level for almost seven years.

Long term effects and criticism of the Government...

Figures show that the deleterious affect of the pound's rise in value are now becoming apparent - factory output fell in May by 1.1 per cent, the biggest drop for four years.

A survey by the Engineering Employers Federation published today confirms that trend, with 1,740 firms in the sector reporting lower exports, more competition from imports, and a brake on investment and job creation.

It's the picture of booming consumer spending that will influence the Bank of England most, especially if they believe, as many financial commentators do, that the Chancellor did too little in last week's budget to rebalance the economy and pull consumer spending back into line.

Roger Bootle, chief economist of the HSBC group, speaking on BBC Radio's World At One said that on their own the inflation figures won't lead bank to put up rates. Instead he criticised Labour's first budget as a "disaster" that failed to rebalance the economy with regard to pulling in consumer spending.

Clarke: imbalance threatening our economy

Clarke on curbing the economy (World At One: dur 5'30")

Former Chancellor Kenneth Clarke also laid the blame for economic imbalance at the door of Chancellor Gordon Brown and last week's budget. He criticised the decision to make the Bank independent, and said that raising interest rates was "the major threat to our economic well being."

He said that one-off events, such as building society windfalls, were making people feel too wealthy, therefore boosting consumer spending but that it was the Chancellor's job to see plan for the long-term.

"Imbalance is a dilemma for policy makers," he said "Policy should be set looking two years ahead. Gordon Brown should have had a budget looking two years ahead, and the Bank should be looking two years ahead."