LONDON, June 29 Reuters Britain39;s economy is struggling under the strain of two major risks in the form of doubledigit inflation and a possible recession, leaving the Bank of England in a dilemma about how much further it should raise interest rates.

The BoE has raised borrowing costs five times since December and its next scheduled rates announcement is on Aug. 4.

The central bank has said it will act forcefully in other words, increase rates more steeply if inflation pressures turn more persistent. But it also expects almost no economic growth over the next three years.

Below is a summary of the conflicting challenges facing BoE Governor Andrew Bailey and his colleagues and finance minister Rishi Sunak.

INFLATION AND INFLATION EXPECTATIONS

Consumer prices leapt by 9.1 in the 12 months to May, the most in 40 years, and the BoE has forecast that inflation will top 11 in October when energy bills go up again.

The BoE says there is little it can do to stop inflation in the short term and its priority is to stop the jump in prices from pushing up longerterm inflation expectations, which would make the problem much harder to fix.

One of the most widely watched measures of inflation expectations the CitiYouGov poll increased sharply in recent months but has shown signs of stabilising or falling.

PAY INCREASES PICK UP PACE

The main way that higher inflation expectations could become embedded in the economy would be through higher pay deals.

Workers39; salaries…