More pressure on pump prices

Oil has hit a fresh record above $135 a barrel on supply fears and US economic concerns.

The fresh peak came in the week the AA motoring organisation reported the highest monthly rise in average diesel prices this century - up by 6.76p to 124.17p a litre. Petrol also leapt 4.49p to 112.55p a litre in the month to mid-May.

The spike in crude oil came after US figures showed an unexpected drop in stockpiles, while downbeat growth forecasts from the US Federal Reserve weakened the dollar.

Oil was trading at around $66 a barrel a year ago - less than half of the current level - but traders have been buying crude as a hedge against the faltering dollar.

This has caused a surge in the price of oil - a practice attacked by AA president Edmund King earlier this week.

The steep rise has also put the Bank of England's efforts to control inflation under pressure.

Governor Mervyn King has warned inflation could spike as high as 3.7 per cent later this year - nearly double its 2 per cent target - on the soaring oil prices, at a time when food and other household bills are on the rise.

The inflation pressure means the Bank's ability to help the economy through lower interest rates is limited.

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