Inflation figures published today show that the cost of living has risen to its highest level for 11 years with inflation running at 3%, making a dent in many people’s saving and investment plans.

Although householders have been subjected to another 0.25% rise in interest rates already in 2007, some economists correctly predicted that inflation – or the Consumer Prices Index for December as it is officially known – would run at 3.0%, above the Government’s target of 2%, and a an erosive factor on saving and investment.

Bank of England governor Mervyn King is now on the point of having to write an explanatory letter to the Government if the rate goes above 3%, the first time this would have happened since the Bank was given independence in 1997.

In the letter he would have to explain to the Chancellor how he intends to bring the inflation rate down to enhance saving and investment in the UK.

The latest level of inflation was known to the Bank before it put up the Bank Rate and it stood at 2.7% in November 2006, so the portents were there for the Monetary Policy Committee – which sets the rate – to see.

A City spokesperson said: “It was fairly easy to see the inflation rate going up to 3%, but even 3.1% was possible, although you would need a surge in food prices to get that sort of jump.”