The governor of the Bank of England, Mervyn King, has stated that there are gloomy times ahead when it comes to inflation levels, and has added that house prices are expected to continue falling. Inflation has now risen to 3%, which is double the target set by the government, which stands at 2%. King said that rising costs such as food and fuel had pushed up inflation levels, adding that the situation was set to get worse with inflation unlikely to come back within target levels for another two years.

King added that house prices would fall, but he didn’t indicate by how much, although a recent document that housing minister Caroline Flint took into a cabinet meeting with her indicated that the government was expecting house prices to fall by between 5 and 10%. Mr King also said that the Monetary Policy Committee was facing challenging times in terms of setting loan interest rates, as members had to take rising inflation into consideration as well as being mindful of the slowing economy.

Following the release of the central bank’s quarterly inflation report Mr King said: “The balancing act faced by the Monetary Policy Committee is even more challenging than it was in February. The MPC is facing its most difficult challenge yet. For the time being at least, the nice decade is behind us.”

He also said: “The credit cycle has turned, commodity prices are rising. We are travelling along a bumpy road as the economy rebalances. Monetary policy cannot and should not try to prevent that adjustment. The MPC must focus on bringing inflation back to the target in the medium term.”