UK energy prices will force up inflation
Bank of England governor Mervyn King has said continuing high UK energy prices will force up inflation, and could pose a threat to the economy.

He said recent rises in UK prices would push short-term inflation, erode the buying power of household incomes and slow the growth of consumer spending.

Mr King told MPs efforts to obtain gas supplies for the UK were being hit by a lack of competition in mainland Europe.

High energy costs are a main reason UK interest rates have stayed at 4.5%.

Mr King said the Bank of England's Monetary Policy Committee (MPC) had kept interest rates steady because there were risks to its inflation forecast on both sides.

"A major risk to the outlook for growth and inflation comes from energy prices," he said.

"Past increases in oil and gas prices may have eroded the supply capacity of the economy and altered the balance between demand and supply."

Capacity issues
At present, there are low levels of gas running through the interconnector pipeline from Belgium to Norfolk - at a time when a fire had damaged the UK's biggest gas storage facility and capacity elsewhere was tight, Mr King said.

Energy suppliers, including British Gas, have now put up household bills well above the rate of increase in consumer prices.

The Office for National Statistics reported earlier this month that consumer prices rose 2.0% in February, up from 1.9% growth in January, but below the recent peak of 2.5% in September.

Mr King told the House of Commons Treasury Committee there was not "a great deal of spare capacity in the UK economy", even though it might seem that the general picture for the economy was "remarkably benign".

He said that the Bank's projection for UK economic growth appeared "pretty plausible", despite the fact that its forecast looked stronger than those from economists.

The Bank of England has forecast economic growth to pick up to about its 2.75% trend rate by the middle of 2006, and move above trend in early 2007 before falling back slightly.

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