Heseltine warns of looming ‘inflation problem’

Just days after consumers were hit by the government’s decision to increase Value Added Tax from 17.5 to 20 per cent, the former Deputy Prime Minister, Lord Heseltine, raised the spectre of further pain ahead for businesses and homeowners.

He told me: “I think that there is an inflation problem that hasn’t yet emerged on a significant scale, but the government or bank will have to take careful note of this. But in any recovery you get the risk that there’ll be inflationary pressure. But I’m not sure we’re talking very large figures by the way.”

His characteristically forthright comments may increase pressure on the Bank of England to raise interest rates to curb inflation.

Lord Heseltine was speaking after touring the North West with the Prime Minister to encourage the private sector to create jobs. He has been brought back to the political front-line by David Cameron to oversee the Regional Growth Fund – which will distribute £1.4bn to businesses over three years to kick-start economic growth.

“I think that there is an inflation problem that hasn’t yet emerged on a significant scale, but the government or bank will have to take careful note of this.” Lord Heseltine

Economists have warned that inflation – which the Bank of England has predicted will peak at 3.6 per cent in March before falling back over the following 12 months – could be pushed to around four per cent by early summer as a result of the VAT increase – that’s more than double the official target.

Lord Heseltine – known as one of the “Big Beasts” of the Conservative Party for the last 30 years – is no stranger to the perils of inflation. During his time in the Thatcher Cabinet, inflation peaked at 22 per cent.

The Consumer Prices Index currently stands at 3.3 per cent – but soaring food and clothing prices are worrying business.

And economists are warning that Britain could slip back into recession because of the combination of public spending cuts, the VAT rise and the prospect of higher interest rates to deal with inflation.