Chancellor Gordon Brown pledged himself yesterday to maintain "anti-inflation discipline" by clamping down on public sector pay rises after official numbers showed prices rises leaped last month above the two per cent target he has set the Bank of England.
He repeated his determination to hold public sector pay rises from next year down to two per cent, indicating that unless inflation is brought back below his target, many public sector workers face a drop in the buying power of their pay.
The stock market, though, was in no mood to be reassured by Mr Brown. It was unsettled by fears of the after-effects of what is now regarded as the near-certainty that US interest rates will go up when the Federal Reserve meets on June 29.
The 100-share Footsie index dropped another 101.3 shares to 5519.6, back where it was last December. Still, that was smaller in percentage terms than the over-night fall on Wall Street and less than half the loss that followed in Tokyo.
It was not a one-way market, either. In the early afternoon the 100-share index was more than 150 points shy on the day and recovered a third of the lost ground by the close, as Wall Street opened mixed.
Oil and metals prices continued to slide. Brent crude came back another $1.46 a barrel to $67.47. In New York US crude for delivery next month dropped $1.26 to $69.10. repeating a similar loss on Monday.
Inflation rising to 2.2 per cent in the year to May was the highest reading since last October, when it stood at 2.3 per cent.
"This is a period of fast-moving change for all economies," Mr Brown told a London conference on Islamic finance.
"Let me say that even as we cope with a doubling of oil prices and the rises in utility prices, we will maintain our vigilance against inflation.
"British inflation remains lower than 2.5 per cent inflation in the euro area and 3.5 per cent in the US. We will be resolute in our anti-inflation discipline.
"I have already made it clear that as public sector settlements are this year averaging 2.25 per cent, in the next year and future years public sector pay settlements should be founded on our inflation target of two per cent."
Last month's British inflation of two per cent was below a 2.3 per cent average in April for the 15 countries in the EU before its latest expansion in 2004 and 2.4 per cent including all the present 25 member states, according to National Statistics. Several of the new members have relatively high inflation, led by Latvia with 6.1 per cent.