MERVYN King, the Governor of the Bank of England, had better get ready to write a letter to Gordon Brown this month explaining why inflation has breached the three per cent target.

That’s the prediction of Tom Vosa, chief economist for the National Australia Bank Group.

Mr King is required to explain to the Chancellor in writing if inflation goes through the three per cent barrier. Inflation was close to going beyond the target in December and looks likely to smash it in January.

Last month’s surprise quarter per cent base rate hike to 5.25 per cent by the Bank’s Monetary Policy Committee was prompted by worrying inflation figures. Committee members split four-four, with Mr King having the casting vote.

Various price pressures are pushing up the consumer price index (CPI), Mr Vosa said, notably higher student fees (up 140 per cent), a six per cent rise in the national minimum wage, higher fuel duty and a doubling of the air passenger duty.

Mr Vosa told business leaders at Clydesdale Banks’s financial solutions centre in Turkey Mill, Maidstone: "We are seeing inflation coming into the system. Goods price inflation is rising and it’s all a bit sticky."

He added: "We think it will breach above three per cent in January and the Governor will be writing a letter to the Chancellor."

However, Mr King would be able to blame decisions by the Chancellor for contributing to higher inflation.

Other price pressures came from retailers, who were apparently raising prices without putting off customers. In the past, Mr Vosa said, they had to reverse price increases when consumers refused to pay them.

Now it seemed customers were prepared to pay whatever was charged, with retail sales rising by 1.1 per cent in December, the strongest growth rate since June 2005. "They went credit crazy," Mr Vosa said.

"If you’re a shopkeeper at the moment, put up your prices, it doesn’t affect demand."

Other price pressures came from manufacturing costs rising at the fastest rate for 12 years. Mr Vosa said he expected interest rates to rise soon by at least another quarter per cent to 5.5 per cent, and there was the outside prospect of more rises to come.

But that would be bad news for the economy. "If we get to six per cent, then we ought to start talking about recession," he warned.